fiscal accountability report fiscal years …...fiscal accountability report fiscal years 2013 –...

A REPORT TO

THE APPROPRIATIONS COMMITTEE AND

THE FINANCE, REVENUE AND BONDING COMMITTEE

PURSUANT TO SECTION 2-36B OF THE CONNECTICUT GENERAL STATUTES

FISCAL ACCOUNTABILITY REPORT

FISCAL YEARS 2013 – 2016

OFFICE OF POLICY AND MANAGEMENT BENJAMIN BARNES, SECRETARY

NOVEMBER 15, 2012

SUMMARY

INTRODUCTION This report outlines significant fiscal factors affecting Connecticut’s budgetary and economic outlook over the next several years. Overall, this report describes an enormously difficult fiscal environment for the state of Connecticut now and for the next few years. This environment poses significant policy challenges to the state which must be addressed now. This report focuses on the facts describing our current fiscal situation, and is not intended to include policy prescriptions. However, it is important to consider the following general points:

• The state faces significant fiscal challenges over the next several years, resulting from

ongoing poor economic conditions nationally and regionally, historic deferral of long‐term liabilities, and fast‐growing demand for public services, especially healthcare.

• Governor Malloy is committed to ensuring the state lives within its means. Extraordinarily difficult decisions to reduce spending will be necessary.

• The Governor will NOT propose tax increases as a solution to these challenges.

• Nevertheless, the Governor intends to identify opportunities to make smart investments that create jobs and improve education, even in these difficult times.

OVERVIEW • Revenues presented in this document align

with the consensus forecast issued jointly by the Office of Policy and Management and the legislature’s Office of Fiscal Analysis on November 9, 2012.

• Expenditures presented in this document are based on projections made by the Office of Policy and Management using a “current services” approach; i.e., the costs of continuing current operations in accordance with current law.

• The following results are projected when comparing current services expenditures to the November consensus revenue forecast: o In the fiscal year ending June 30, 2013,

the Office of Policy and Management is

currently projecting a General Fund budget deficit of $365 million.

o In the fiscal year ending June 30, 2014, the Office of Policy and Management is currently projecting a General Fund deficit of $1,180 million. Projected expenditures are $1,242 million over the level allowable by the state’s expenditure cap.

o In the fiscal year ending June 30, 2015, the Office of Policy and Management is currently projecting a General Fund deficit of $959 million. Projected expenditures are $1,815 million over the level allowable by the state’s expenditure cap.

MAJOR ISSUES AND TRENDS IMPACTING THE STATE’S FISCAL SITUATION • Connecticut has made progress over the

last two years by: o Addressing a significant projected

shortfall for the FY 2012 and FY 2013 biennium;

o Implementing Generally Accepted Accounting Principles;

o Shoring up the state employee pension system;

o Streamlining state government; o Conducting a special legislative session

devoted solely to jobs and the economy; and

o Reforming education.

Fiscal Accountability Report

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• The performance of the economy as the state and nation recover from the “Great Recession” has significantly impacted revenues and expenditures. o Recovery has been and will continue to

be slow. o Revenue sources are affected by the

pace of recovery. o Unemployment remains high. o A Medicaid budget shortfall is projected

for fiscal year 2013. • Connecticut’s fiscal future will largely be

determined by forces outside of the control of state leaders. o Federal policy makers must resolve the

current budgetary and economic impasse by addressing the so‐called “fiscal cliff.”

o The European debt crisis is a substantial source of uncertainty for the global economy.

• Demand for government services remains significant. o Government spending is, by design,

counter‐cyclical. The need for such spending, however, comes at a time when it is hardest for the state to pay for it.

o The projected Medicaid shortfall is a classic example: the need for medical assistance increases as people lose their jobs and associated health benefits.

• Connecticut is not alone amongst the states. o The northeastern part of the nation has

seen a particularly tepid recovery, with New York, New Jersey, Massachusetts, Maine, and Connecticut all falling short of revenue projections.

o Resolution of national issues will affect economic and budgetary performance in every state.


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Estimated ProjectedGeneral Fund 2012‐13 2013‐14 2014‐15 2015‐16

Revenues(1) 19,015.1$ 19,723.6$ 21,032.3$ 22,136.6$ Expenditures 19,380.1 20,803.6 21,890.9 22,943.7

Balance ‐ Budgetary basis (365.0)$ (1,080.0)$ (858.6)$ (807.1)$ Transfer for GAAP Amortization(2) (100.0) (100.0) (100.0)

Balance ‐ GAAP basis (1,180.0)$ (958.6)$ (907.1)$

Special Transportation FundRevenues 1,234.6$ 1,336.0$ 1,342.3$ 1,364.5$ Expenditures 1,232.7 1,320.4 1,394.1 1,462.9

Balance ‐ Budgetary basis 1.9$ 15.6$ (51.8)$ (98.4)$

Other Funds (3)

Revenues 170.8$ 246.3$ 250.0$ 254.6$ Expenditures 170.3 245.9 249.8 254.2

Balance ‐ Budgetary basis 0.5$ 0.4$ 0.2$ 0.4$

Total All Appropriated FundsRevenues 20,420.5$ 21,305.9$ 22,624.6$ 23,755.7$ Expenditures 20,783.0 22,370.0 23,534.8 24,660.7

Balance ‐ Budgetary basis (362.5)$ (1,064.1)$ (910.2)$ (905.0)$ Transfer for GAAP Amortization(2) (100.0) (100.0) (100.0)

Balance ‐ GAAP basis (1,164.1)$ (1,010.2)$ (1,005.0)$

Expenditure Cap ResultsTotal All Appropriated Funds 22,370.0$ 23,534.8$ 24,660.7$ Allowed Appropriations per Cap 21,128.0 21,720.0 22,422.6

Over/(Under) the Cap 1,242.0$ 1,814.8$ 2,238.1$

Revenues and the Expenditure Cap(4)

Revenues ‐ All Funds 21,305.9$ 22,624.6$ 23,755.7$ Allowed Appropriations per Cap 21,128.0 21,720.0 22,422.6

Revenues Less Allowed Approps. 177.9$ 904.6$ 1,333.1$ Transfer for GAAP Amortization(2) (100.0) (100.0) (100.0)

Balance ‐ GAAP basis 77.9$ 804.6$ 1,233.1$

(1) Revenues reflect the November 9, 2012 consensus revenue forecast.(2)

(3)

(4) Article 3, section 18 of the State Constitution requires a balanced budget.

INTRODUCTION

FINANCIAL SUMMARY OF FUNDS(in millions)

This report has been prepared in accordance with Section 2‐36b of the Connecticut General Statutes. It contains the estimated revenues for the three fiscal years next ensuing the 2011‐13 biennium and projected expenditures for the same period.

Other funds include the: a) Mashantucket Pequot and Mohegan Fund, b) Soldiers, Sailors and Marines' Fund, c) Regional Market Operating Fund, d) Banking Fund, e) Insurance Fund, f) Consumer Counsel and Public Utility Fund, g) Workers' Compensation Fund, and h) Criminal Injuries Compensation Fund.

Estimated Current Services

Amounts beginning in FY 2013‐14 reflect amortization of the cumulative GAAP deficit in accordance with Public Act 11‐48.


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Section 1 Estimate of State Revenues,

Expenditures and Ending Balance

ASSUMPTIONS

ASSUMPTIONS USED TO DEVELOP EXPENDITURE ESTIMATES

The Estimated 2012‐2013 column shows the current year appropriation adjusted to reflect deficiencies and lapses as estimated in OPM’s October 20, 2012 letter to the Comptroller. FY 2014 and FY 2015 projections are based on OPM’s current services estimates of expenditure requirements over the biennium and the FY 2016 projection is based on the rollout of the FY 2015 current services estimate using the inflation factors noted below.

GENERAL ASSUMPTIONS

Projected expenditures for FY 2014 and FY 2015 are based on OPM’s review of agency current services requests for the upcoming biennium. In general, the current services expenditure level reflects the cost of continuing existing programs and services and includes the following factors:

• Increases attributable to settled collective bargaining agreements. • Nondiscretionary increases, including caseload growth, mandated by federal or state law, court order or

consent decree provisions. • Operating costs of new buildings scheduled to open during the FY 2013‐2015 biennium. • New programs authorized by the General Assembly to begin during the FY 2013‐2015 biennium. • Reductions due to the completion of projects authorized in previous years or that result from changes in

the scope, nature, timing or feasibility of a project. • Annualization of partial costs from the prior fiscal year. • Replacement cost of essential equipment. • With notable exceptions, inflation allowances were based on the following assumptions:

FY 2013‐14 Over

FY 2014‐15 Over

Item FY 2012‐13 FY 2013‐14 Food & Beverage 1.8% 1.76% Medical Care 4.37% 4.25% Fuel Oil 7.54% 1.95% Natural Gas 37.44% 9.31% Electricity 4.87% 6.23% Motor Vehicle Fuel (gasoline, diesel) 7.54% 2.82% All Other (including discretionary grants and revolving fund) 2.17% 2.9%

In addition, costs related to settled collective bargaining agreements are built into agency budgets. The estimated cost of unsettled collective bargaining agreements are budgeted within OPM’s Reserve for Salary Adjustments account. Projections for FY 2016 are, with exceptions noted below, based on a standard inflation assumption of 2.42% and a medical inflation rate of 4.16%. Personal Services was inflated by 4.5% over the FY 2015 level. Expenditures increased by the standard inflation rates include: Other Expenses, Other Current Expenses, and Grants. Partial year costs are annualized. Equipment costs are not inflated and reflect the FY 2015 current services estimate.


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NOTABLE EXCEPTIONS

Listed below are significant items within the three outyears that were developed using other than the standard inflation guidelines, or that require further explanation. STATE TREASURER - DEBT SERVICE • Debt Service-State Treasurer - Reflects actual and projected issuance schedules. STATE COMPTROLLER- MISCELLANEOUS • Adjudicated Claims - Reflects level funding. STATE COMPTROLLER - FRINGE BENEFITS • State Employee Retirement Contributions - Reflects the FY 2014 and FY 2015 actuarially required contributions

from the June 30, 2012 draft valuation. FY 2016 reflects a 7.7% increase over FY 2015. • Judges and Compensation Commissioners Retirement - Reflects the FY 2014 and FY 2015 actuarially required

contributions from the June 30, 2012 draft valuation. FY 2016 reflects a 7.7% increase over the FY 2015. • State Employee and Retiree Health Service Costs - Reflects medical inflation. OFFICE OF POLICY AND MANAGEMENT • Increase in Caseload for Renter's Rebate Program - Reflects an increase in caseload of 6.5%, which is the

average growth rate for the program over the past five fiscal years. DEPARTMENT OF PUBLIC HEALTH • Breast and Cervical Cancer Detection and Treatment, Medicaid Administration, Children's Health Initiatives -

Reflects Personal Services inflation applied to salary component of account. Medical inflation applied to remainder of Breast and Cervical Cancer Detection and Treatment, and standard inflation applied to remainder of Medicaid Administration and Children's Health Initiatives accounts.

• X-Ray Screening and Tuberculosis Care, Immunization Services - Reflects medical inflation. • Local and District Departments of Health - Per capita grant reflects 0.5% population growth. DEPARTMENT OF DEVELOPMENTAL SERVICES • Caseload Growth - Reflects caseload growth and annualization for high school graduates, age outs, court-ordered

placements, Money Follows the Person, and other community placements in the Employment Opportunities and Day Services, Community Residential Services, and Cooperative Placements Program accounts.

• Leap Year - Per Diem-based Payments - Reflects FY 2016 leap year costs for per diem expenses in the Community Residential Services, Voluntary Services, and Cooperative Placements Program accounts.

• Workers' Compensation - Reflects medical inflation applied to medical expenses; Personal Services inflation applied to indemnity expenses.

DEPARTMENT OF MENTAL HEALTH AND ADDICTION SERVICES • Personal Services and Other Expenses - Reflects adjustment for inflation on Disproportionate Share amount of

$79,818,546, which is budgeted in the Department of Social Services - DMHAS/Disproportionate Share Account. • Professional Services, General Assistance Managed Care, Behavioral Health Medications, and Medicaid Adult

Rehabilitation Option - Reflects leap year payments in FY 2016. • General Assistance Managed Care - Reflects anticipated caseload growth. • Young Adult Services and TBI Community Services - Reflects annualization of anticipated caseload. DEPARTMENT OF SOCIAL SERVICES • State-Funded Supplemental Nutrition Assistance Program, HUSKY Program, Medicaid, Old Age Assistance, Aid

to the Blind, Aid to the Disabled, Temporary Assistance to Families, ConnPACE, Connecticut Home Care Program, Child Care - TANF/CCDBG, State Administered General Assistance - Reflects anticipated cost and caseload changes based on current trends.

• Medicaid - Reflects expansion of Medicaid coverage for low-income adults with income up to 133% of the federal poverty level beginning January 1, 2014.

• Medicaid, Old Age Assistance, Aid to the Blind, Aid to the Disabled - Reflects leap year payments in FY 2016. • Medicaid, Housing/Homeless Services - Reflects transition of additional clients under the Money Follows the

Person initiative.


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• Housing/Homeless Services - Reflects an additional 150 certificates in each year under the Rental Assistance Program for affordable housing.

SOLDIERS, SAILORS AND MARINES' FUND • Award Payments to Veterans - Reflects 4.5% inflation to medical portion of account. DEPARTMENT OF REHABILITATION • Part-Time Interpreters - Reflects Personal Services inflation rate. • Educational Aid for Blind and Visually Handicapped Children - Reflects Personal Services inflation rate and

standard inflation for non-PS items. DEPARTMENT OF EDUCATION • Connecticut Technical High School System - Reflects PS and OE inflation. • Education Equalization Grants - Reflects flat funding the ECS grant, except Charter School funding that is

included in the appropriation, which is increased by standard inflation. UNIVERSITY OF CONNECTICUT HEALTH CENTER • Operating Expenses - Reflects the 4.50% Personal Services inflation rate, and the 2.42% standard inflation rate

for the non-salary, non-capital costs of the Bioscience Initiative. • AHEC- Reflects level funding. TEACHERS' RETIREMENT BOARD • Retirement Contributions - Reflects the FY 2014 and FY 2015 actuarially determined contributions from the June

30, 2012 valuation. FY 2016 reflects an 8% increase over FY 2015. • Retiree Health and Municipal Retiree Health - Reflects medical inflation rate. DEPARTMENT OF CHILDREN AND FAMILIES • Local Systems of Care - Reflects Personal Services inflation on salary component; standard inflation on

remainder. • Board and Care for Children - Adoption, Foster Care, Residential - Leap Year - Board and Care for Children

accounts have been adjusted in 2016 for the cost of an additional per diem payment due to leap year. • Board and Care for Children - Adoption - Reflects anticipated growth in the number of clients served. • Board and Care for Children - Residential, No Nexus Special Education - Reflects rate increases determined

through the Single Cost Accounting System for in-state residential treatment facilities and no-nexus special education costs as authorized in statute.


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SUMMARY OF APPROPRIATED FUND PROJECTIONS(In Millions)

Current CurrentEstimated Service Service Projected2012-2013 2013-2014 2014-2015 2015-2016

GENERAL FUNDDSS - Medicaid 4,958.0$ 5,226.7$ 5,653.2$ 6,039.0$ STATEWIDE - Personal Services 2,070.2 2,229.6 2,337.0 2,445.6 SDE - Education Equalization Grants 2,007.6 2,017.6 2,026.7 2,028.8 OTT - Debt Service 1,606.3 1,681.8 1,794.8 1,892.5 TRB - Retirement Contributions 787.5 948.5 984.1 1,062.8 OSC - Employee Retirement Contribution 721.5 912.4 963.3 1,037.5 OSC - Retired Employee Health Serv Cost 614.1 701.0 743.5 774.4 OSC - State Employees Health Serv Cost 568.0 563.0 602.8 627.9 STATEWIDE - Other Expenses 457.7 501.2 524.4 537.2 DDS - Community Residential Services 437.9 451.7 470.9 496.2 DSS - Disproportionate Share-Med Emer Asst 268.5 268.5 268.5 268.5 SDE - Magnet Schools 242.4 275.0 290.8 297.8 OSC - Employers Social Security Tax 222.0 221.9 231.8 237.5 DDS - Employment Opportunities & Day Svcs 200.3 217.8 227.7 234.9 UOC - Operating Expenses 192.3 200.8 212.5 220.0 DCF - Board & Care - Residential 177.0 155.2 158.6 164.6 MHA - General Assistance Managed Care 167.2 175.9 183.9 201.7 BOR - Regional Community - Technical Colleges 143.2 147.3 154.4 161.4 BOR - Connecticut State University 141.2 143.6 150.5 157.3 SDE - Excess Cost - Student Based 139.8 177.3 185.9 190.4 SDE - Regional Vocational-Technical School Sys 134.8 149.0 159.0 165.7 SDE - Priority School Districts 121.9 122.0 121.2 124.1 OTT - Pension Obligation Bonds - TRB 121.4 145.1 133.9 132.9 OTT - UConn 2000 - Debt Service 117.7 135.3 156.0 169.2 OPM - Loss Taxes Private Tax-Exempt Property 115.4 115.4 115.4 115.4 DCF - Board and Care for Children - Foster 113.3 115.7 116.6 119.5 DSS - Temporary Assist to Families - TANF 113.2 106.9 106.8 106.8 UHC - Operating Expenses 112.2 128.6 139.0 144.9 DSS - DMHAS – Disproportionate Share 108.9 108.9 108.9 108.9 DSS - Child Care Services - TANF/CCDBG 104.4 105.6 111.6 117.9 DCF - Board and Care for Children - Adoption 89.6 91.6 93.2 96.8 DOC - Inmate Medical Services 85.6 90.6 95.8 99.6 MHA - Grants for Mental Health Services 76.5 76.9 76.9 80.1 OPM - Loss of Taxes on State Property 73.6 73.6 73.6 73.6 MHA - Young Adult Services 64.0 70.3 76.5 80.7 DSS - Aid to the Disabled 60.6 61.9 66.5 71.5 DSS - Housing/Homeless Services 57.6 62.0 66.6 71.2 JUD - Alternative Incarceration Program 55.1 56.7 56.7 58.1 DSS - Connecticut Home Care Program 47.3 45.9 47.2 49.1 OPM - Reserve for Salary Adjustments 44.1 51.2 60.2 61.7 DOC - Community Support Services 40.6 40.8 40.8 41.8 MHA - Managed Service System 39.9 40.1 40.2 41.9 DSS - Old Age Assistance 36.4 37.5 39.9 42.5 DDS - Early Intervention 34.9 35.0 35.0 36.5 DDS - Voluntary Services 31.4 32.7 32.7 33.5 OSC - Higher Ed Alternative Retirement Sys 31.2 33.5 34.5 35.3 DSS - HUSKY B Program 29.9 29.9 31.7 33.3 DOL - Workforce Investment Act 29.2 29.9 30.8 30.8 JUD - Juvenile Alternative Incarceration 28.3 28.4 28.4 29.1 DOC - Workers' Compensation Claims 27.6 28.8 30.0 30.7 DAS - Workers' Compensation Claims 27.0 28.3 29.5 30.8


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DHE - CT Aid for Public College Students 25.5 26.1 26.8 27.5 OPM - Tax Relief for Elderly Renters 25.3 26.9 28.7 30.4 MHA - Grants for Substance Abuse Services 24.9 25.1 25.1 26.2 SDE - Transportation of School Children 24.9 84.7 87.0 89.1 DCF - Community KidCare 23.7 23.8 23.9 24.4 DDS - Cooperative Placements Program 22.9 24.2 25.2 26.4 SDE - OPEN Choice Program 22.1 35.0 40.6 41.6 SDE - Adult Education 21.0 22.9 23.5 24.1 OPM - Prop Tax Relief Elder-Circuit Breaker 20.5 20.5 20.5 20.5 SDE - Develop of Mastery Exams Grades 4,6&8 19.1 20.1 21.0 21.5 SDE - Child Care Services 18.4 18.4 18.4 18.9 DPH - Immunization Services 18.4 29.9 31.2 32.5 DOL - Jobs First Employment Services 17.7 18.0 18.5 19.0 DCF - Support for Recovering Families 16.8 16.9 16.9 17.3 TRB - Retirees Health Service Cost 16.4 25.2 31.0 32.2 MHA - Housing Supports and Services 16.3 17.0 17.0 17.7 DHE - CT Independent College Student Grant 16.2 16.5 17.0 17.4 OSC - Judges & Comp Commissioner Ret 16.0 16.3 17.7 18.0 DDS - Workers' Compensation Claims 15.2 15.9 16.6 17.3 DCF - Individualized Family Supports 14.9 14.8 15.2 15.6 DSS - State Administered General Assistance 14.7 16.1 16.6 17.2 SDE - Sheff Settlement 14.3 9.3 9.4 9.6 MHA - TBI Community Services 14.3 15.4 17.2 18.9 DCF - Gts Psychiatric Clinics for Children 14.2 14.3 14.3 14.6 MHA - Discharge and Diversion Services 14.0 18.7 22.5 23.1 DAS - IT Services 13.8 14.7 15.2 15.5 DCF - Family Support Services 13.5 13.6 13.6 13.9 DCF - Juvenile Justice Outreach Services 13.4 13.7 13.7 14.0 DDS - Supplemental Payments for Medical Services 13.4 13.4 13.4 13.4 DSS - Children's Trust Fund 13.1 13.2 13.2 13.5 DAS - Insurance & Risk Operations 12.4 13.0 13.7 14.0 JUD - Youthful Offender Services 12.2 18.7 18.7 19.1 DAS - Rents and Moving 11.9 12.2 12.3 12.6 MHA - Professional Services 11.8 11.9 12.1 12.6 DPH - School Based Health Clinics 11.5 12.9 12.9 13.2 ECD - Statewide Marketing 11.5 11.7 12.1 12.4 MHA - Workers' Compensation Claims 10.6 11.2 11.7 12.2 DSS - Connecticut Children's Medical Center 10.6 10.6 10.6 10.6 MHA - Employment Opportunities 10.5 10.5 10.5 10.8 DCF - Workers' Compensation Claims 10.3 11.7 12.3 12.8 SDE - American School for the Deaf 10.3 10.7 11.2 11.4 SDE - Interdistrict Cooperation 10.1 10.4 10.4 10.6 STATEWIDE - Changes in Expenditure Accruals - 82.2 95.8 118.8 STATEWIDE - ALL OTHER 531.4 556.7 571.8 587.5 General Fund - Gross 19,496.4$ 20,920.0$ 22,007.3$ 23,060.0$ Unallocated Lapse (91.7) (91.7) (91.7) (91.7) Unallocated Lapse - Legislative (3.0) (3.0) (3.0) (3.0) Unallocated Lapse - Judicial (7.4) (7.4) (7.4) (7.4) General Lapse - Executive (13.8) (13.8) (13.8) (13.8) General Lapse - Legislative (0.1) (0.1) (0.1) (0.1) General Lapse - Judicial (0.4) (0.4) (0.4) (0.4) General Fund - Net 19,380.1$ 20,803.6$ 21,890.9$ 22,943.7$


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SPECIAL TRANSPORTATION FUND - Gross 1,243.7$ 1,331.4$ 1,405.1$ 1,473.9$ Unallocated Lapses (11.0) (11.0) (11.0) (11.0) Special Transportation Fund - Net 1,232.7$ 1,320.4$ 1,394.1$ 1,462.9$

BANKING FUND - Gross 25.6$ 26.1$ 27.5$ 28.5$ Branch Savings Target - Judicial (0.1) (0.1) (0.1) (0.1) Banking Fund - Net 25.5$ 26.0$ 27.4$ 28.5$

INSURANCE FUND 28.7$ 30.5$ 31.7$ 32.9$

CONSUMER COUNSEL/PUBLIC UTILITY FUND 25.4$ 24.9$ 26.1$ 27.1$

WORKERS' COMPENSATION FUND 21.3$ 22.1$ 22.7$ 23.6$

MASHANTUCKET PEQUOT AND MOHEGAN FUND 61.8$ 135.0$ 135.0$ 135.0$

SOLDIERS, SAILORS AND MARINES' FUND 3.0$ 3.1$ 3.1$ 3.3$

REGIONAL MARKET OPERATION FUND 0.9$ 0.9$ 1.0$ 1.0$

CRIMINAL INJURIES COMPENSATION FUND 3.6$ 3.4$ 2.8$ 2.9$

TOTAL ALL FUNDS - NET 20,783.0$ 22,370.0$ 23,534.8$ 24,660.7$


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Taxes 2012‐13 2013‐14 2014‐2015 2015‐2016Personal Income Tax 8,554.3$ 9,011.9$ 9,631.8$ 10,289.3$ Sales & Use Tax 4,002.3 4,158.0 4,322.4 4,529.7 Corporation Tax 726.2 660.6 698.8 688.6 Public Service Tax 275.2 279.3 284.4 288.7 Inheritance & Estate Tax 166.2 172.9 179.8 187.0 Insurance Companies Tax 237.6 221.4 225.6 230.2 Cigarettes Tax 411.1 399.1 388.0 376.9 Real Estate Conveyance Tax 100.3 104.3 109.8 114.9 Oil Companies Tax 167.8 209.1 209.9 207.8 Electric Generation Tax 70.6 ‐ ‐ ‐ Alcoholic Beverages Tax 59.3 59.8 60.2 60.6 Admissions & Dues Tax 39.6 40.0 40.4 40.8 Health Provider Tax 520.0 522.6 525.2 527.8 Miscellaneous Tax 20.1 20.5 20.8 21.2 Total Taxes 15,350.6$ 15,859.5$ 16,697.1$ 17,563.5$ Less Refunds of Tax (1,050.6) (1,065.2) (1,117.3) (1,171.4) Less Earned Income Tax Credit (116.5) (126.6) (133.0) (139.7) Less R&D Credit Exchange (5.8) (7.3) (7.8) (8.2) Total ‐ Taxes Less Refunds 14,177.7$ 14,660.4$ 15,439.0$ 16,244.2$

Other RevenueTransfers‐Special Revenue 305.1$ 306.0$ 306.9$ 309.0$ Indian Gaming Payments 311.6 310.1 308.5 307.0 Licenses, Permits, Fees 262.8 296.0 272.4 306.9 Sales of Commodities 34.8 36.1 37.2 38.5 Rents, Fines, Escheats 107.7 112.5 114.4 116.3 Investment Income 1.0 1.9 2.2 2.5 Miscellaneous 162.9 166.5 168.3 170.1 Less Refunds of Payments (55.0) (55.0) (55.0) (57.5) Total ‐ Other Revenue 1,130.9$ 1,174.1$ 1,154.9$ 1,192.8$

Other SourcesFederal Grants 3,762.9$ 4,105.9$ 4,656.2$ 4,909.0$ Transfer From Tobacco Settlement 93.1 91.0 90.0 98.4 Transfers From (To) Other Funds (149.5) (307.8) (307.8) (307.8) Total ‐ Other Sources 3,706.5$ 3,889.1$ 4,438.4$ 4,699.6$

Total ‐ General Fund Revenues 19,015.1$ 19,723.6$ 21,032.3$ 22,136.6$

Taxes 2012‐13 2013‐14 2014‐2015 2015‐2016Motor Fuels Tax 495.8$ 500.4$ 499.5$ 498.4$ Oil Companies Tax 199.4 222.7 226.8 231.4 Sales Tax ‐ DMV 77.2 78.4 79.9 81.4 Total Taxes 772.4$ 801.5$ 806.2$ 811.2$ Less Refunds of Taxes (7.8) (7.9) (8.0) (8.3) Total ‐ Taxes Less Refunds 764.6$ 793.6$ 798.2$ 802.9$

Other SourcesMotor Vehicle Receipts 235.8$ 236.3$ 236.9$ 237.5$ Licenses, Permits, Fees 140.0 140.4 141.1 141.7 Interest Income 3.1 4.6 5.0 6.4 Federal Grants 13.1 13.1 13.1 13.1 Transfers From (To) Other Funds 81.2 151.3 151.3 166.3 Less Refunds of Payments (3.2) (3.3) (3.3) (3.4) Total ‐ Other Sources 470.0$ 542.4$ 544.1$ 561.6$

Total ‐ STF Revenues 1,234.6$ 1,336.0$ 1,342.3$ 1,364.5$

NOTE: The above revenue schedule reflects the November 9, 2012 consensus revenue estimates per C.G.S. 2‐36c.

PROJECTED REVENUESNovember 9, 2012 Consensus Revenue Forecast

(In Millions)

General Fund

Special Transportation Fund


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2012‐13 2013‐14 2014‐2015 2015‐2016Mashantucket Pequot and Mohegan Fund Revenues 61.8$ 135.0$ 135.0$ 135.0$

Soldiers, Sailors, and Marines' Fund Revenues 3.1$ 3.1$ 3.2$ 3.3$

Regional Market Operating Fund Revenues 1.0$ 1.0$ 1.0$ 1.1$

Banking Fund Revenues 25.6$ 26.1$ 27.4$ 28.5$

Insurance Fund Revenues 28.8$ 30.5$ 31.7$ 33.0$

Consumer Counsel & Public Utility Control Revenues 25.4$ 25.0$ 26.1$ 27.1$

Workers' Compensation Fund Revenues 21.4$ 22.2$ 22.8$ 23.7$

Criminal Injuries Fund Revenues 3.7$ 3.4$ 2.8$ 2.9$

All Appropriated Funds Revenues 20,420.5$ 21,305.9$ 22,624.6$ 23,755.7$

(In Millions)

PROJECTED REVENUES


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Fiscal Fiscal Fiscal Fiscal 2012‐13 2013‐14 2014‐15 2015‐16

UNITED STATES

Gross Domestic Product 3.9% 5.4% 6.5% 5.7%

Real Gross Domestic Product 1.9% 3.1% 4.3% 3.7%

G.D.P. Deflator 1.9% 2.2% 2.1% 1.9%

Unemployment Rate 8.0% 7.7% 6.7% 6.1%

New Vehicle Sales (M) 14.79 16.53 16.79 15.83

Consumer Price Index 2.1% 2.5% 2.7% 2.4%

CONNECTICUT

Personal Income 3.0% 5.8% 7.2% 6.4%

Nonagricultural Employment 0.2% 1.3% 2.4% 2.4%

Housing Starts (T) 4.90 5.30 6.92 8.03

Unemployment Rate 7.9% 7.1% 6.0% 5.3%

(M) denotes millions(T) denotes thousands

General FundTaxes 2012‐13 2013‐14 2014‐15 2015‐16

Personal Income Tax 1 4.9, 12.7 7.2, 2.3 7.4, 6.0 7.0, 6.5Sales & Use Tax 4.6 3.9 4.0 4.8Corporation Tax ‐2.0 2.0 2.7 4.5Public Service Tax 9.6 1.5 1.8 1.5Inheritance & Estate Tax ‐13.3 4.0 4.0 4.0Insurance Companies Tax 0.0 0.0 1.9 2.0Cigarettes Tax ‐2.4 ‐2.9 ‐2.8 ‐2.9Real Estate Conveyance Tax 3.5 4.0 5.3 4.6Oil Companies Tax ‐1.5 1.6 1.0 0.7Alcoholic Beverages Tax 0.5 0.8 0.7 0.7Admissions & Dues Tax 3.0 1.0 1.0 1.0

Special Transportation FundTaxes 2012‐13 2013‐14 2014‐15 2015‐16Motor Fuels Tax ‐2.3 ‐0.7 0.0 0.0Sales Tax ‐ DMV 0.8 1.6 1.4 1.8

NOTES:1. Rates for withholding and "estimates and final filings".

(PERCENT CHANGE)

ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES

ECONOMIC GROWTH RATES FOR PROJECTED TAX REVENUES


12

Section 2 Projected Tax Credits

2012‐13 2013‐14 2014‐15 2015‐16

Personal Income Tax CreditsProperty Tax 214,000$ 218,000$ 222,000$ 226,000$ Job Tax Credits 2,000 5,000 5,000 5,000 Earned Income Tax Credit 116,500 126,600 133,000 139,700 Connecticut Higher Education Trust (CHET) 7,500 7,500 7,500 7,500 Angel Investor 6,000 3,000 ‐ ‐

Total Personal Income Tax 346,000$ 360,100$ 367,500$ 378,200$

Business Tax CreditsFixed Capital 70,000$ 70,000$ 70,000$ 70,000$

Film Industry Production(1) 55,000 65,000 70,000 75,000

Film Industry Digital Animation(1) 15,000 15,000 15,000 15,000

Film Industry Infrastructure(1) 4,000 5,000 5,300 5,600

Electronic Data Processing(1) 25,000 25,800 26,600 27,400 Research and Experimental Expenditures 15,500 16,000 16,500 17,000 Research and Development Expenditures 5,000 5,200 5,400 5,600 Urban and Industrial Reinvestment 30,000 30,000 30,000 30,000

Housing Program Contribution(1) 10,000 10,000 10,000 10,000 Job Tax Credits 7,500 15,000 15,000 15,000 Historic Rehabilitation 1,500 1,500 1,500 1,500 Human Capital 1,500 1,500 1,500 1,500 Machinery and Equipment 1,000 1,000 1,000 1,000 All Other Credits 7,000 10,000 10,000 10,000

Total Business Tax Credits 248,000$ 271,000$ 277,800$ 284,600$

Total Projected Amount Claimed 594,000$ 631,100$ 645,300$ 662,800$

(1) Includes credits claimed under the Corporation Tax, Insurance Premiums Tax, and the Public Service Companies Tax.

PROJECTED TAX CREDITS

Projected Total Amounts of Tax Credits Claimed(In Thousands)

It should be noted that the basis for projections of tax credits claimed relies upon data from several years ago. This is due to thefact that information regarding tax credits is typically delayed as firms often request an extension to file their final returns. Thisdelays the receipt of such data by the tax department which then must still have the return information data captured.

In calculating the expected amount of credits to be claimed, OPM examined the most recent relevant years available (incomeyears ranging from 2005 to 2009 for business credits and income year 2010 for the personal income tax credit). An average valuewas derived over that time period which then became the base for fiscal year 2012. From fiscal year 2013 and forward, the dollarvalue of credits claimed was increased by appropriate growth rates.


13

Section 3 Summary of Estimated Deficiencies

SUMMARY OF ESTIMATED DEFICIENCIES (REASONS FOR DEFICIENCIES AND BASIS OF ASSUMPTIONS)

The following deficiency is anticipated in the General Fund:

DEPARTMENT OF SOCIAL SERVICES

After accounting for various offsetting lapses, a net shortfall of $260 million is forecast in the Medicaid program, largely due to increased utilization of medical services and increasing caseloads in the Low‐Income Adults (LIA) program. Hospital expenditures, in particular, are much higher than appropriated levels. Nursing home expenditures are also higher than the enacted budget, which assumed a greater number of transitions to the community under the Money Follows the Person program. In addition, caseload growth in the LIA program continues to exceed earlier projections. The enacted budget did not assume the current caseload level of 83,827 would be reached until August 2013. With the latest caseload figures from October 5.4% above those projected less than a year ago, LIA continues to drive up costs in the Medicaid program.

WATCH AREAS

Several areas of the budget have the potential to significantly impact General Fund balance. OPM continues to closely watch trends in several agencies that may impact future expenditure projections, including Personal Services and Other Expenses costs in the departments of Correction and Emergency Services and Public Protection which are currently running above the levels that can be supported by available appropriations. Additionally, the uncertain outlook with regard to the national and global economic picture could impact the state budget in the second half of fiscal year 2013. Continued political gridlock and brinksmanship at the national level relative to addressing the budget and economy, including the prospects of sequestration and the expiration of tax cuts and other significant federal policies in January, coupled with global economic concerns, create a significant level of uncertainty in budget planning.


14

Section 4 Projected Balance of the

Budget Reserve Fund

BUDGET RESERVE FUNDPROJECTED FUND BALANCE

(in millions)

GENERAL FUND SURPLUS DISPOSITION WITH ADHERENCE TO THE EXPENDITURE CAP1. GAAP Amortization FY 2012 FY 2013 FY 2014 FY 2015 FY 2016General Fund Surplus/(Deficit) * (143.6)$ (365.0)$ 100.0$ 829.4$ 1,275.2$ Transfer for GAAP Amortization ‐ ‐ (100.0) (100.0) (100.0)

General Fund Surplus/(Deficit) (143.6)$ (365.0)$ ‐$ 729.4$ 1,175.2$

2. Economic Recovery Notes (ERN)General Fund Surplus/(Deficit) (143.6)$ (365.0)$ ‐$ 729.4$ 1,175.2$ Pre‐pay ERN's ‐ ‐ ‐ (199.4) ‐

General Fund Surplus/(Deficit) (143.6)$ (365.0)$ ‐$ 530.0$ 1,175.2$ Defeased ERN Debt Service ‐ ‐ ‐ ‐ 208.4

General Fund Surplus/(Deficit) (143.6)$ (365.0)$ ‐$ 530.0$ 1,383.6$

3. Budget Reserve Fund (BRF)

Beginning Balance 236.9$ 93.4$ ‐$ ‐$ 530.0$ Deposits/(Withdrawals) (143.6) (93.4) ‐ 530.0 1,383.6

Ending Balance 93.4$ ‐$ ‐$ 530.0$ 1,913.6$

Balance as Percent of Budget 0.5% 0.0% 0.0% 2.5% 8.9%

Budget Reserve Fund Target(1) 1,914.0$ 1,962.4$ 2,020.3$ 2,086.1$ 2,154.1$ (3)

Balance Over/(Under) Target (1,820.7)$ (1,962.4)$ (2,020.3)$ (1,556.1)$ (240.5)$

Available Over BRF Target (2) ‐$ ‐$ ‐$ ‐$ ‐$

STATUTORY DISPOSITION OF FUTURE SURPLUSESNote: C.G.S. 4‐30a directs any unappropriated surplus to the Budget Reserve Fund, except as provided below:

FY 2013 Reference1. GAAP‐ Up to $50 million C.G.S. 4‐30c2. ERN's‐ Redeem FY 2009 Economic Recovery Notes C.G.S. 4‐30b3. Budget Reserve Fund C.G.S. 4‐30a

FY 2014‐FY 20171. GAAP‐ Annual amortization of the deferred charge C.G.S. 4‐30c2. ERN's‐Redeem FY 2009 Economic Recovery Notes C.G.S. 4‐30b3. Budget Reserve Fund C.G.S. 4‐30a

FY 2018‐FY 20281. GAAP‐ Annual amortization of the deferred charge C.G.S. 4‐30c2. Budget Reserve Fund C.G.S. 4‐30a

* Attribution of All Funds Expenditure Cap to the General Fund and Resultant SurplusFY 2014 FY 2015 FY 2016

Expenditure Reductions to Remain Below Cap 1,242.0$ 1,814.8$ 2,238.1$ Estimated G.F. Share @ 95% in FY '14 / 93% in FY '15 & '16 1,180.0$ 1,688.0$ 2,082.3$

G.F. Revenues 19,723.6$ 21,032.3$ 22,136.6$

General Fund, Current Services 20,803.6$ 21,890.9$ 22,943.7$ G.F. Expenditure Reductions to Remain Below Cap (1,180.0) (1,688.0) (2,082.3)

Revised G.F. Expenditures 19,623.6$ 20,202.9$ 20,861.4$

Balance ‐ Budgetary Basis 100.0$ 829.4$ 1,275.2$

(1) Target Balance is equal to ten percent of the next fiscal year's adjusted General Fund appropriations.(2) Available for debt service and/or unfunded liabilities when BRF target of 10% has been reached.(3) FY 2016 Target Balance assumes average expenditure growth rate of previous two years.


15

Section 5 Projected Bond Authorizations,

Allocations and Issuances

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017Bond Authorizations General Obligation Bonds 2,316,398,635$ 1,500,000,000$ 1,500,000,000$ 1,350,000,000$ 1,350,000,000$ Special Tax Obligation Bonds 635,239,168 600,000,000 500,000,000 500,000,000 500,000,000 Clean Water Fund Revenue Bonds 238,360,000 250,000,000 250,000,000 250,000,000 250,000,000 Bioscience Collaboration Program 85,113,000 59,728,000 19,669,000 21,425,000 21,108,000 UCONN 21st Century 143,000,000 198,000,000 208,500,000 199,500,000 160,900,000 CSUS 2020 95,000,000 95,000,000 95,000,000 95,000,000 95,000,000 Total Bond Authorizations 3,513,110,803$ 2,702,728,000$ 2,573,169,000$ 2,415,925,000$ 2,377,008,000$ Bond Allocations General Obligation Bonds School Construction Program 600,000,000$ 575,000,000$ 525,000,000$ 525,000,000$ 525,000,000$ Urban Action Grants 75,000,000 75,000,000 75,000,000 75,000,000 75,000,000 Small Town Economic Assistance Program 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 Housing Trust Fund & Housing Programs 75,000,000 75,000,000 75,000,000 75,000,000 75,000,000 Clean Water Grants 94,000,000 100,000,000 100,000,000 100,000,000 100,000,000 Manufacturing Assistance Act 165,000,000 100,000,000 100,000,000 100,000,000 100,000,000 Small Business Express Program 50,000,000 - - - - Local Capital Improvement Program 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 Community College System 50,000,000 53,600,000 68,300,000 63,300,000 73,725,000 Connecticut State University System - CSUS 2020 95,000,000 95,000,000 95,000,000 95,000,000 95,000,000 UConn Technology Park Development - 154,500,000 - - - Bioscience Collaboration Program 85,113,000 59,728,000 19,669,000 21,425,000 21,108,000 Connecticut Innovations Recapitalization 25,000,000 25,000,000 25,000,000 25,000,000 - All other GO projects/programs 250,000,000 150,000,000 150,000,000 150,000,000 150,000,000 UCONN 21st Century 143,000,000 198,000,000 208,500,000 199,500,000 160,900,000 Total General Obligation Bonds 1,757,113,000$ 1,710,828,000$ 1,491,469,000$ 1,479,225,000$ 1,425,733,000$ Special Tax Obligation Bonds 725,000,000 600,000,000 500,000,000 500,000,000 500,000,000 Clean Water Fund Revenue Bonds 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000 Total Bond Allocations 2,732,113,000$ 2,560,828,000$ 2,241,469,000$ 2,229,225,000$ 2,175,733,000$

FY2013 FY2014 FY2015 FY2016 FY2017Bond Issuance General Obligation Bonds 1,500,000,000$ 1,500,000,000$ 1,500,000,000$ 1,500,000,000$ 1,500,000,000$ Special Tax Obligation Bonds 600,000,000 600,000,000 600,000,000 600,000,000 600,000,000 Clean Water Revenue Bonds 150,000,000 150,000,000 150,000,000 200,000,000 200,000,000 UCONN 21st Century 189,000,000 248,000,000 208,500,000 199,500,000 160,900,000 Total Bond Issuance 2,439,000,000$ 2,498,000,000$ 2,458,500,000$ 2,499,500,000$ 2,460,900,000$

Debt Service General Fund 1,850,923,196$ 1,967,612,140$ 2,090,240,566$ 2,200,208,100$ 2,288,216,424$ Transportation Fund 457,974,187 468,759,515 489,400,798 520,142,562 540,948,264 Total Debt Service 2,308,897,383$ 2,436,371,655$ 2,579,641,364$ 2,720,350,662$ 2,829,164,688$ Debt Service as a Percentage of Budget GO Debt Service as Percentage of General Fund 9.6% 9.5% 9.5% 9.6% 9.6%Total Debt Service 11.2% 11.0% 11.1% 11.1% 11.1%

Assumptions

Bond AuthorizationsProjected General Obligation Bond authorizations assume that authorizations continue at historical average levels.Clean Water Program Revenue Bond authorizations based on projected allocations.UCONN 21st Century authorizations in accordance with C.G.S. Section 10a-109g as amended.CSUS 2020 authorizations in accordance with C.G.S. Section 10a-91e as amended.Bioscience Collaboration Program authorizations in accordance with C.G.S. Section 32-41z.

Bond AllocationsThese projected bond allocations do not represent a commitment to fund any of these programs or projects.

FIVE YEAR BOND PROJECTIONS


16

Section 6 Revenue and Expenditure Trends,

Major Cost Drivers

5.2%

‐3.0%

‐1.6%

6.4%

2.5%3.0%

5.8%

‐4.0%

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2008 2009 2010 2011 2012 2013 2014

Percentage

Growth

Fiscal Year

CT Personal Income Growth

5.9%

4.5%

3.4%3.0%

2.0%2.4%

3.2%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2010 2011 2012 2013* 2014* 2015* 2016Percentage

Growth

Fiscal Year

CT Expenditure Cap Growth Rate

EXPENDITURE CAP

* Inflation is the limiting factor

The enacted revised FY 2013 budget is $142.2 million below the cap.

While revenues have been the sole limiting factor for the budget over the past few years, that is no longer the case.

Personal income growth serves as the cap’s proxy for the economy’s ability to pay for government services.

Two years of declines in Connecticut personal income will begin to influence upcoming expenditure cap rates.

The next few years will see the lowest allowable expenditure cap growth rates since its inception.

The secondary measure of inflation was the limiting factor in FY 2013 and is projected to be in FY 2014 and FY 2015 as well. (See asterisked years in chart at top right.)


17

GENERAL FUND ECONOMIC GROWTH RATES

0.2%

8.9%7.6%

8.9%

6.1%

3.3%

‐11.1%

‐2.1%

10.3%

0.9%

4.4%5.6%

6.5%5.4%

‐15%

‐10%

‐5%

0%

5%

10%

15%

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Est.

'14 Fcst.

'15 Fcst.

'16 Fcst.

Econom

ic Growth Rate

Fiscal Year

• Adjusted for tax changes, General Fund revenues rose 10.3% in FY 2011.

• Atypical for an economic recovery, the growth slowed sharply to just 0.9% in FY 2012.

• In the outyears, the latest consensus forecast anticipates a weaker recovery than was exhibited after

the 2002 recession.

• Federal Grant revenue skews the growth higher as significant additional funds are anticipated under the Affordable Care Act starting in FY 2014.


18

SLOWER ECONOMIC RECOVERY Tepid Economic Rebound

• From peak to trough, U.S. economic output fell by 4.7%.

• It has taken 4 years for the U.S. economy to regain its pre-recession level of output.

• The average post-WWII recovery period is 1.2 years.

• Currently U.S. GDP is 2.1% above its 2007 peak.

• From peak to trough, CT economic output fell by 9.3%.

• It will take an estimated 6.5 years for the CT economy to regain its pre-recession level of output.

100.0

95.3

100.9

102.1

94.0

95.0

96.0

97.0

98.0

99.0

100.0

101.0

102.0

US Real Gross Domestic ProductPeak, 2007Q4=100; In 2005 Dollar

Source: US Department of Commerce, BEA

Peak 2007Q4 GDP: $13,326.0B

4 years

84.0

86.0

88.0

90.0

92.0

94.0

96.0

98.0

100.0

102.0

104.0

2007

q1

2007

q2

2007

q3

2007

q4

2008

q1

2008

q2

2008

q3

2008

q4

2009

q1

2009

q2

2009

q3

2009

q4

2010

q1

2010

q2

2010

q3

2010

q4

2011

q1

2011

q2

2011

q3

2011

q4

2012

q1

2012

q2

2012

q3

2012

q4

2013

q1

2013

q2

2013

q3

2013

q4

CT Real Gross State ProductPeak, 2007Q1=100; In 2005 Dollar

Source: US Department of Commerce, BEA

Peak 2007Q1 GSP: $210.08

6.5 years

100.0

100.4

90.7


19

SLOWER ECONOMIC RECOVERY Sub-Par State Revenue Growth

By setting peak years to an index value of 100 and removing the impact of tax changes, ready comparisons can be made about subsequent performance. For the two most recent recessions, revenue peaked in FY 2001 and FY 2008, respectively.

86.3

108.1

100.0

82.7

95.5

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

0 1 2 3 4

Years from Peak

Personal Income TaxImpact of Recessions on Baseline Revenue

2002Recession

2008Recession

Peak Years: FY 2001 & FY 2008

• Unlike the prior recession, income tax revenues have yet to exceed their previous peak.

• Removing the impact of tax changes, revenue remains 4.5% below FY 2008 levels.

• If this recovery had been similar to the 2003 recovery, income tax revenue would have been $650 million higher in FY 2012 (Index value of 103.6).

• The same phenomenon has occurred with the state’s sales tax, down 4.5% from FY 2008 levels.

• Had the sales tax recovered at the same pace as in 2003, revenues would have been $75 million higher in FY 2012 (Index value of 97.5).

99.3

108.9

100.0

88.9

95.5

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

0 1 2 3 4

Years from Peak

Sales Tax Impact of Recessions on Baseline Revenue

2002Recession

2008Recession

Peak Years: FY 2001 & FY 2008


20

SLOWER ECONOMIC RECOVERY

Latest Economic Projections Have Declined Compared to a Year Ago

• Two years ago the unemployment forecast was 5.8% for FY 2014.

• The latest projection for FY 2014 is 7.4%.

• Employment growth has improved compared to a year ago.

• Last year projections indicated employment growth of -0.1% and 0.0% in FY 2012 and FY 2013, respectively.

• Latest projections call for 0.6% and 0.8% in FY 2012 and FY 2013, respectively.

• Projections for FY 2014 declined from 1.8% to 1.6%.

8.8%

7.1%5.8%

8.8% 8.4%7.4%

8.2% 8.0% 7.4%

2012 2013 2014

Fiscal Year

Connecticut Unemployment Rate

As of November 15, 2010 As of November 15, 2011 As of November 15, 2012

Source: Moody's Economy.comSource:

0.6%

0.2% 0.2%

‐0.1%

0.0%

1.8%

0.6%0.8%

1.6%

‐0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2012 2013 2014Fiscal Year

Connecticut Employment Growth


Source: Moody's Economy.com


21


Latest Economic Projections Have Declined Compared to a Year Ago

• A year ago, the U.S. economy was projected to grow 3.7% in FY 2013. This has been revised downward to 1.9%.

• Similarly, for FY 2014 growth has been revised from 3.9% to 3.0%.

• The recovery in the housing sector has been delayed and will be less substantial than projected last year at this time.

• Two years ago economic projections indicated 10,560 new housing starts in Connecticut. The latest projections are less than half that figure.

4.3%4.9%

3.5%

2.4%

3.7% 3.9%

2.0% 1.9%

3.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2012 2013 2014

Growth

Fiscal Year

US Real Gross Domestic Product



5.97

9.9 10.56

3.014.93

7.47

3.79 4.05 4.81

024681012

2012 2013 2014

Fiscal Year

Connecticut Housing Starts(in thousands)




22

SLOWER ECONOMIC RECOVERY Lower Household Net Worth and Stagnant Incomes

• Household net worth for all Americans peaked at $64,104 billion in 2007 Q2.

• The financial crisis wiped-out 24% of households’ total net worth, from peak to trough.

• Even today, U.S. household net worth remains 14% below the 2007 peak. This has negative consequences for consumers’ ability to borrow against their assets and consumer confidence via the “wealth effect”.

• From its peak in 2008 Q2, U.S. real personal income had declined $755 billion, or 6.5% by 2009 Q4.

• From its peak in 2008 Q2 to 2012 Q1 there has been no cumulative growth in U.S. real personal income.

• This has a significant dampening effect on current consumption.

010,00020,00030,00040,00050,00060,00070,000

1988

1989

1990

1991

1993

1994

1995

1996

1998

1999

2000

2001

2003

2004

2005

2006

2008

2009

2010

2011

Year

Total Household Net Worth(Billions)

Source: Bureau of Economic Analysis

6,000

7,000

8,000

9,000

10,000

11,000

12,000

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year

US Real Personal Income(Billions)



23

SLOWER ECONOMIC RECOVERY Paying for Past Consumption and Saving for the Future

• In 2006, U.S. household debt peaked at 134% of personal income.

• U.S. households have been slowly paying off this debt, decreasing to 113% in 2012 Q2.

• It remains at an elevated level compared to the 1960s & 1970s.

• Repayment for past consumption is acting as a drag on current consumption.

• At the current pace it will take approximately 15 years to reach the 1952-1990 average of 65%.

• The U.S. household savings rate reached a low of 1.3% in 2005 Q3.

• By 2008 Q2 it had increased to 6.2%.

• Although necessary, this also diverts resources from current consumption.

• The increase in household savings, which includes debt repayment, is equivalent to 1.9% annually of U.S. GDP since CY 2008.

0%

20%

40%

60%

80%

100%

120%

140%

160%

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Deb

t to Pe

rson

al In

come

Year

US Household Debt as a Percentage of Personal Income


0.01.02.03.04.05.06.07.08.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year

US Household Savings Rate



24


Interest rates are at historic lows.

• Interest rates have fallen dramatically over the past two decades.

• In a normal economic environment, this would increase consumption.

• The financial crisis damaged the asset side of consumers’ balance sheets resulting in consumers favoring debt reduction to increased consumption, despite a favorable interest rate.

• This inhibits the effectiveness of monetary policy.

• The ratio of debt service paid by households relative to their personal income has fallen dramatically since the financial crisis.

• While this is good for consumers, it is primarily caused by historically low interest rates.

• The low interest rate environment is providing consumers time to address their debt levels.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1988

1989

1991

1993

1995

1996

1998

2000

2002

2003

2005

2007

2009

2010

2012

Year

US Interest Rates

New Car Loans

30 Year Mortgage

10 Year Treasury Note

Source: U.S. Board of Governors of the Federal Reserve System , Freddie Mac

9.0

10.0

11.0

12.0

13.0

14.0

15.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year

US Household Debt Service to Personal Income Ratio

Source: U.S. Board of Governors of the Federal Reserve System


25

PERSONAL INCOME TAX

ESTIMATES AND FINALS TAX COLLECTIONS

(In Millions)

$1,501.0

$1,785.8

$1,361.7 $1,230.6

$1,588.4

$1,943.5

$2,322.0

$2,616.6

$3,135.0

$2,230.6

$2,685.0

$3,043.3

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Fiscal Year

$2,308.8

• The estimates and finals component of the income tax typically represents one‐third of total income tax collections.

• It has been extremely volatile over the years.

• In FY 2002, estimates and finals fell by $424.1 million.

• In FY 2003, they fell by an additional $131.1 million for a total of $555.2 million or 31% from the 2001 peak.

• In FY 2009 alone, estimates and finals fell by $904.4 million and fell an additional $475.4 million (excluding the impact of the tax increase on millionaires) in FY 2010, for a total decline over two years of approximately $1.4 billion or 44.5% from the 2008 peak.

• The increase in actual collections in FY 2010 was a result of increasing the top tax rate from 5% to 6.5%, the underlying economic growth rate was ‐21.3%.

• Although FY 2012 increased by 13.3%, almost all of that growth was due to the tax increase enacted during the 2011 legislative session.


26

PERSONAL INCOME TAX TRENDS ECONOMIC GROWTH RATES OF THE PERSONAL INCOME TAX

7.5%

10.4%

15.1%

8.9%9.5%

8.7%

‐1.5% ‐1.8%

6.0%

7.8% 7.1% 7.8%

4.5%

‐3.7%

0.8%

5.2%

3.6%

4.9%

7.2% 7.4% 7.0%

‐7%

‐2%

3%

8%

13%

18%

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Est.

'14 Fcst.

'15 Fcst.

'16 Fcst.

Econom

ic Growth Rate

Fiscal Year

Withholding Tax

• Over the past decade Connecticut’s income tax revenue has fluctuated dramatically. • This was due to the performance of the stock market and two recessions.

• Performance in the financial markets significantly influences the growth in this revenue source.

14.5%

32.3%

14.2%14.9%

19.0%

‐23.5%

‐14.7%

21.9%22.8%

19.4%

13.0%

17.9%

‐27.3%

‐21.3%

27.7%

0.3%

12.7%

2.3%

6.0% 6.5%

65.0%

‐52.0%

‐16.0%

33.0%

‐60.0%

‐38.0%

93.0%

‐80%

‐60%

‐40%

‐20%

0%

20%

40%

60%

80%

100%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Est.

'14 Fcst.

'15 Fcst.

'16 Fcst.

Capital G

ains Growth Rate

E & F Econo

mic Growth Rate

Fiscal Year

Estimates & Finals vs. Capital Gains Realizations

Estimates & Final

CT Capital Gains

Note: Capital Gains are for the immediately preceding calendar year.


27

CAPITAL GAINS ARE NOT A STABLE REVENUE SOURCE (In Millions)

Conn. S&P 500 Income Capital Percent Percent Year Gains Change Change 1994 $2,547 ‐16% ‐2% 1995 $3,832 50% 34% 1996 $4,732 23% 20% 1997 $7,787 65% 31% 1998 $9,867 27% 27% 1999 $11,800 20% 20% 2000 $15,435 31% ‐10% 2001 $7,391 ‐52% ‐13% 2002 $6,231 ‐16% ‐23% 2003 $8,723 40% 26% 2004 $10,626 22% 9% 2005 $13,765 30% 3% 2006 $15,784 15% 12% 2007 $21,006 33% 4% 2008 $8,377 ‐60% ‐38% 2009 $5,172 ‐38% 23% 2010 $9,962 93% 13% 2011 Data not yet available 0% 2012 14% YTD

Sources: Department of Revenue Services and Internal Revenue Service various years YTD through 10/1/2012

• Capital gains income is strongly influenced by the performance of the stock market.

• In high years capital gains can

represent almost 15% of total adjusted gross income.

• In low years, they can represent

just 5% of total adjusted gross income.

• Unfortunately, a record high year

can be immediately followed by a record low year, devastating state finances.

• In 2009, capital gains revenues

were less than 25% of the 2007 record high.


28

SALES TAX TRENDS

ECONOMIC GROWTH RATES OF THE SALES AND USE TAX

7.1%

4.9%

1.2%

‐1.9%

5.6%

3.9%2.8% 3.0%

2.3%

‐7.9%

‐3.5%

4.9%

2.4%

4.6%3.9% 4.0%

4.8%

‐10%

‐7%

‐4%

‐1%

2%

5%

8%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Est.

'14 Fcst.

'15 Fcst.

'16 Fcst.

Econom

ic Growth Rate

Fiscal Year

• The sales tax dropped in two consecutive years, fiscal 2009 and 2010, due to chaos in the financial

market and the worst economic downturn since WWII. • Beginning in late fiscal 2008, collections started to weaken as the housing market deteriorated with

prices declining and foreclosure rates increasing.

• Without the federal stimulus packages, FY 2009 and FY 2010 would have been worse.

• Collections in late fiscal 2011 improved markedly as employment and personal income increased.

• A 1.0% increase in the sales and use tax growth rate results in a revenue gain of more than $30 million.


29

MOTOR FUELS TAX TRENDS AND THE SPECIAL TRANSPORTATION FUND

ECONOMIC GROWTH RATES OF THE MOTOR FUELS TAX

2.6%

1.3%0.9%

4.2%

‐0.6%‐0.5%

‐3.7%‐3.2%

0.9%

‐1.1%

‐1.9%‐2.3%

‐5.0%

‐3.0%

‐1.0%

1.0%

3.0%

5.0%

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Est.Fiscal Year

• Consumers began to curtail consumption as prices began to rise.

• By the summer of 2008, record high gasoline prices and the onset of a severe national recession

forced consumers to significantly alter their driving habits and/or mode of transportation in an effort to reduce their gasoline bill in the short term.

• Gasoline consumption rose in FY 2010 but the decline in FY 2011 consumption more than offset the one year of positive growth.

• Since FY 2005, the cumulative decline in motor fuels tax revenue is 11.8%.

• This trend is not just a cyclical change, but a major structural change on the part of consumers.

• In FY 2012, motor fuels tax revenue equaled 40% of the total revenue of the Special Transportation Fund which is down from 55.4% in FY 2003. Declining growth in motor fuels revenue has led to an increasing reliance on other revenue sources to support the fund, including transfers from the General Fund.


30

GROWTH IN SIGNIFICANT STATE EXPENDITURES Fiscal Year 2011 through Estimated FY 2016

• Chart represents growth in various budget factors relative to FY 2011 level.

• Significant cost drivers include health and pension costs for active and retired state employees and teachers, Debt Service, and expenditures related to the Medicaid program.

• Pension and health benefits for state employees and teachers, and Medicaid have grown at annual rates that are significantly higher than either the Consumer Price Index or the growth in personal income and are anticipated to continue to be significant cost drivers for the foreseeable future.

• The above figures reflect actual General Fund expenditures through FY 2012 and estimated expenditures for FY 2013 through FY 2016. The above figures do not reflect amortization of Other Post Employment Benefits (OPEB) obligations.

‐20%

0%

20%

40%

60%

80%

100%

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Teachers' Retirement SystemState Employee Retirement Sys.

Medicaid & GA Managed Care

State Emp. & Retiree Healthcare

Debt Service

All Other General Fund

CT Personal Income

CPI


31

$3,349 $3,377

$3,720

$4,121 $4,116

$4,618

$4,878

$5,125

$5,403

$5,837

$6,241

25,000

50,000

75,000

100,000

125,000

150,000

175,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

'06 '07 '08 '09 '10 '11 '12 '13Est.

'14Fcst.

'15Fcst.

'16Fcst.

Case

load

-Lo

w-I

ncom

e Ad

ults

(HUS

KY D

)

Expe

nditu

res

(in m

illio

ns)

Fiscal Year

Expenditures CaseloadLow-Income Adults (Includes DMHAS GA Managed Care Expenditures and State Administered General Assistance)

DEPARTMENT OF SOCIAL SERVICES

MEDICAID EXPENDITURES

• With expenditures increasing 86% from FY 2006 to FY 2016, growth in the Medicaid program is the major cost

driver in the Department of Social Services.

• Medicaid growth since FY 2006 has been affected by utilization and rate increases for hospitals, nursing homes, physicians and other providers. Medicaid expenditures grew by only 0.35% from FY 2006 to FY 2007 due to the shift of pharmaceutical costs to the federal government under Medicare Part D and by only 0.1% from FY 2009 to FY 2010 largely as a result of increased pharmacy rebates and lower Medicare Part D clawback payments (due to enhanced reimbursement available under ARRA) and reduced nursing home expenditures. In FY 2012, expenditures under DSS’ Medicaid account represented approximately 81% of DSS’ budget.

• The Medicaid expansion for low‐income adults (LIA), which was approved by the federal government in June 2010, has resulted in significant increases in caseload and program costs. Expenditures for LIA, also known as HUSKY D, increased from $599.3 million in FY 2011 to $658.2 million in FY 2012, an increase of 10%. Projected expenditures reflect the impact of federal health care reform, which expands Medicaid coverage under LIA by increasing income eligibility to 133% of the federal poverty level beginning January 1, 2014.

• Future growth will also be impacted by increased alternatives to nursing home care under the Money Follows the Person demonstration as the state invests in the rebalancing of long‐term services and supports.

Note: Medicaid expenditures have been adjusted to include expenditures under the former State Administered General Assistance (SAGA) medical assistance program, as well as the General Assistance Managed Care account in DMHAS which supports behavioral health services for the SAGA / LIA population.


32

LONG‐TERM OBLIGATIONS

• The state’s long‐term obligations total $66.1 billion, down 7.7% from last year’s reported amount of $71.6 billion.

• This equates to approximately $18,500 per capita, down $1,950 from last year’s reported

amount of $20,450.

LONG‐TERM OBLIGATIONS (In Billions)

LONG‐TERM OBLIGATIONS ARE SIGNIFICANT (In Millions)

Bonded Indebtedness - As of 8/31/12 19.3$ State Employee Pensions - Unfunded as of 6/30/12 13.3 Teachers' Pension - Unfunded as of 6/30/12 11.1 State Employee Post Retirement Health and Life - Unfunded 17.9 Teachers' Post Retirement Health and Life - Unfunded 3.0 Cumulative GAAP Deficit (General Fund Unreserved) est. as of Oct. 2012 1.5 Total 66.1$

$(19,300)$(17,900)

$(13,300)$(11,100)

$(3,000)$(1,500)

$93

$(30,000)

$(25,000)

$(20,000)

$(15,000)

$(10,000)

$(5,000)

$-

$5,000

Budget Reserve

Fund

Teachers'Pension

Teachers'OPEB

StateEmployees'

Pension

Budget Reserve

GAAPDeficit

Teachers'Pension

StateEmployees'

Pension

BondedIndebtedness

StateEmployees'

OPEB


33

$

$1,

$1,

$2,

$2,

$3,

$3,

STAT

ALL FUNDS (In Millions)

• Tota

theseresul

• Pens

SEBArecog

• Healtestim

• Healtto benum

$415

$368

$203

$986

$0

$500

,000

,500

,000

,500

,000

,500

FY 02

Note: Rinclude

TE EMP

– As of 6/30

l pension ande expenditurelt of changes

sion increasesAC IV & V adgnition of inv

th insurance mated to be 1

th insurance e 24.2% higheber of retiree

$426 $47

$394$43

$240$31

$1,060$1,2

FY 03 FY 0

SERS

Retiree Health es payment def

LOYEE

0

d health costes are anticipresulting from

s beginning idjustments, tvestment loss

costs for act11.9% higher t

costs for retier than in cures.

74 $516 $

0$486

$

8$374

$22$1,376

$1

04 FY 05 FY

S

includes offseferrals in FYs 2

ES PENS

s more than pated to contm the 2009 a

in FY 2013 athe decreasees from 2008

tive employeethan in the cu

irees during trrent bienniu

623 $664

527 $572

390$415

,540$1,651

$

Y 06 FY 07 F

Active H

ts for the Med2009 through 2

SION &

doubled in ttinue to grownd 2011 SEBA

re due to see in the expe8 and 2009.

es during theurrent bienniu

the upcomingum (FYs 2012

$717 $700

$619 $652

$450 $435

$1,786 $1,787

FY 08 FY 09

Health

dicare Part D Em2011.

& HEAL

he eight yearw, the rate of AC agreemen

everal factorsected rate o

e upcoming bum (FYs 2012

g biennium (and 2013). T

$833 $844

$648 $655

$542 $491

$2,023 $1,99

FY 10 FY 1

R

mployer Subsid

LTH IN

rs from fiscalincrease is pts.

s, including thf return on

biennium (FYs2 and 2013).

FYs 2014 andThis is mainly

4 $926$1,

5$687

$7

1$549

$690

$2,162

$2,

11 FY 12 FYFc

etiree Health

dy in FYs 2007

NSURAN

2002 to 201projected to s

he eliminatioinvestments

s 2014 and 2

d 2015) are e due to the in

,060$1,269 $

711

$757

614

$701

,385

$2,727

$

Y 13 cst.

FY 14 Fcst.

F

through 2012

NCE

10. While slow as a

on of the and the

2015) are

stimated ncreased

$1,379 $1,485

$808$870

$743

$800

$2,930

$3,156

FY 15 Fcst.

FY 16 Fcst.

. SERS


34

STATE EMPLOYEES RETIREMENT SYSTEM Components of Pension Liability

Based on 6/30/12 Valuation ($ in Thousands) % of Total Retired/Deferred Liability $16,646,788 72.3% Active – Tier I Hazardous 66,445 0.3% Active – Tier IB 1,343,050 5.8% Active – Tier IC 50,903 0.2% Active – Tier II Hazardous 1,246,123 5.4% Active – Tier II Others 2,316,785 10.1% Active – Tier IIA Hazardous 590,337 2.6% Active – Tier IIA Others 756,291 3.3% Active ‐ Tier III Hazardous 431 0.0% Active ‐ Tier III Others 1,599 0.0% Total Accrued Liability $23,018,752 Actuarial Value of Assets 9,744,986 Unfunded Accrued Liability $13,273,766 Normal cost $249,996 Amortization of UAL $1,018,938 Annual Required Contribution $1,268,934

Retired/Deferred Liability , 72.3%

Active – Tier I , 6.3%

Active – Tier II, 15.5%

Active – Tier IIA, 5.9%

Active ‐ Tier III, 0.0%

• $23.0 billion total liability.

• Most (72.3%) of that liability is related to already‐retired employees.

• $13.3 billion unfunded liability.

• 80% of the actuarially required contribution is for the unfunded accrued liability.


35

PENSION OBLIGATIONS ‐ SERS STATE EMPLOYEES RETIREMENT SYSTEM AS OF 6/30

• State Employees unfunded pension liabilities have grown since the 6/30/11 valuation due to changes in the economic and demographic assumptions.

• The State’s obligations at the end of FY 2012 total $13.3 billion.

• This obligation represents roughly $3,707 per capita.

State Employee Retirement State Employee Retirement System Pension Contributions Fund Rate of Return = 8.25%

Fiscal Year

Actuarial Required

Contribution State

Contribution Percent

Fiscal Year Rate of Return

Market Value Basis 2001-02 $415 $415 100% 2001-02 -6.6% 2002-03 $426 $421 99% 2002-03 1.9% 2003-04 $474 $470 99% 2003-04 15.2% 2004-05 $516 $516 100% 2004-05 10.5% 2005-06 $623 $623 100% 2005-06 11.0% 2006-07 $664 $664 100% 2006-07 17.1% 2007-08 $717 $712 99% 2007-08 -4.8% 2008-09 $754 $700 93% 2008-09 -18.3% 2009-10 $897 $721 80% 2009-10 12.9% 2010-11 $944 $826 88% 2010-11 21.2% 2011-12 $926 $926 100% 2011-12 -0.9% 2012-13 $1,060 $1,060 100% SERS utilizes 5 year smoothing. 2013-14 est. $1,269 $1,269 100% 2014-15 est. $1,379 $1,379 100% 2015-16 est. $1,485 $1,485 100%

* In millions

• The deferral of the SERS contribution was $50 million in FY 2009, $164.5 million in FY 2010 and $100 million in FY 2011.

• Starting in FY 2013, the SEBAC IV & V adjustments are eliminated.

• Starting in FY 2014, the assumed rate of return is lowered from 8.25% to 8%.

$3.2 $3.4 $3.5 $3.9 $4.3$4.9

$6.9

$7.9

$9.3

$11.7$11.0

$13.3

51%

54%

57%59%

63%62%

54%53%

52%

44%

48%

42% $2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

40%

45%

50%

55%

60%

65%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2011 2012

Billions

Fund

ed R

atio

Unfunded Actuarial Liabilities

Unfunded PensionsFunded Ratio


36

PENSION OBLIGATIONS ‐ TRS

CONNECTICUT TEACHERS’ RETIREMENT SYSTEM AS OF 6/30

TEACHERS’ RETIREMENT SYSTEM CONTRIBUTIONS *

$2.4 $2.6$3.0 $3.2

$2.2

$3.3

$5.2

$6.9$6.5

$9.1

$11.1

67%68%

69%70%

81%

76%

65%

60%

70%

61%

55%

$1.5

$2.5

$3.5

$4.5

$5.5

$6.5

$7.5

$8.5

$9.5

$10.5

$11.5

50%

55%

60%

65%

70%

75%

80%

85%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Billi

ons

Fund

ed R

atio

Unfunded Actuarial Accrued Liabilities

Unfunded Pensions

Funded Ratio

$226 $237

$429 $329

$559 $582

$757 $788 $949 $984

$1,063

$170 $176

$90 $210

$59 $65

$81$121

$145 $134$133

$204 $215 $205 $180 $185 $185

$396 $412

$519 $539 $618 $647

$838 $909

$1,094 $1,118 $1,196

$20 $120 $220 $320 $420 $520 $620 $720 $820 $920

$1,020 $1,120 $1,220 $1,320

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Fcst.

'15 Fcst.

'16 Fcst.

Mill

ions

Fiscal Year

Debt Service

Surplus Funds

• The State’s obligations at the end of FY 2012 total $11.1 billion.

• Appropriations in FY 2006, FY 2007, FY 2008 and FY 2009 were supplemented by the use of surplus funds.

• The decline in the funded ratio is primarily attributable to the recognition of the net investment experience over the past four years.

* FY 2010 and beyond include debt service on the $2.3 billion pension obligation bonds issued on April 30, 2008 on behalf of the Teachers’ Retirement System.


37

• Receno

o

OT

nt OPEB Refo 2009 – The

• Nethhe

• Ememth

2011 –Thechanges th

• Aljus

• StaCaye

• Grshmaind

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

Billion

sO

THER PO

rms: e state entere

ew Employeeeir first 10 yeealth.

mployees withmployee with ey reach 10 y

e state enterehat impact th

l Employees –st new emplo

0.5% ef 2.0% ef 3.0% ef

The contribsooner.

ate Match – Eare Trust Fundear.

reater Premiuares for retiraximum of thdividuals who

$21.7

2006 Valuati

OPEB Un

OST EM

ed into an agr

s – Effective 7ears of emplo

h fewer than fewer than 5

years of empl

ed into a furthe state’s OPE

– The agreemoyees, phasedffective the fiffective the fiffective the fibutions will co

Effective July d an amount

um Share for ee health carhree percent. o elect early r

$

on 2008 V

funded

PLOYM

reement with

7/1/2009, all yment, contr

5 years – Effe5 years of servoyment.

her agreemenEB liability:

ment expands d‐in as followirst day of theirst day of theirst day of theontinue for te

1, 2017, the equal to the

Early Retireere coverage wThe new agreretirement, ra

$26.6

Valuationw

Actuaria

MENT BE

h SEBAC whic

new health cribute 3% of t

ective 7/1/20vice will cont

nt with SEBAC

the 3% contrs: e pay period ae pay period ae pay period aen years or un

state will conamount cont

s – Before thiwere minimal,eement impoanging from t

$31.2

2011 Valuatioithout the refo

al Accru

ENEFITS

h specified th

care eligible eheir salaries t

010, any healtribute 3% of

C which incor

ribution to all

after July 1, 2after July 1, 2after July 1, 2ntil retiremen

ntribute to thributed by em

is agreement, ranging fromoses premiumtwo percent t

$1

on orms

2011 Valurefo

ed Liabi

hat:

employees wito fund retire

th care eligibltheir salaries

porates addit

l employees,

2013; 2014; 2015. nt, whichever

e Retiree Heamployees in e

, the premiumm zero to a m sharing on o forty perce

17.9

uation with orms

lity

ill, for ee

e until

tional

not

r is

alth each

m

ent,


38

based on the number of years of service and the number of years retiring early. The premium for any given employee will be capped at 25% of the person’s actual pension benefit.

• The OPEB valuation as of June 30, 2011 (issued in May of 2012) reflects the reforms mentioned above and the corresponding impact on the OPEB liability. As a result the UAAL is now $17.9 billion, a decrease of $8.7 billion from the 2008 valuation.

• If the state had not implemented any reforms, the UAAL would have increased to $31.2 billion. The reforms have therefore reduced the OPEB liability by $13.3 billion.

• Based on the most recent valuation, the OPEB trust fund contained $49.6 million in net assets as of June 30, 2011.

• Deposits to the OPEB Trust Fund: o State Contributions:

• $10 million – FY 2008. A state appropriation represented the state’s first deposit into the fund.

• $14.5 million – FY 2011. This sum was deposited at the end of FY 2011 from the year end fund balance per the 2009 SEBAC agreement.

o Employee Contributions:

• $1.4 million – FY 2010. Represents collections in FY 2010 from new employees per the 2009 SEBAC agreement.

• $21.6 million – FY 2011. Collections from new employees and employees with less than 5 years of service per the 2009 SEBAC agreement.

• $25.0 million – FY 2012. Collections from new employees and employees who had less than 5 years of service on 7/1/2010 per the 2009 SEBAC agreement.


39

DEBT BURDEN

State and Local Debt Comparison Among the 50 States in 2010

Ranked by Per Capita State and Local Debt-2010

Ranked by State and Local Debt As a % of Personal Income (PI)- 2010

Rank State Amount ($) Rank State Debt/PI 1 New York 16,319 1 New York 33.6%

2 Massachusetts 14,827 2 Alaska 32.3%

3 Alaska 14,241 3 Kentucky 29.8%

4 Rhode Island 11,590 4 Massachusetts 28.9%

5 Connecticut 11,415 5 Nevada 28.2%

6 New Jersey 11,138 6 Rhode Island 27.6%

7 California 10,806 7 Texas 26.2%

8 Illinois 10,586 8 Kansas 26.0%

9 Washington 10,523 9 California 25.4%

10 Nevada 10,416 10 South Carolina 25.3%

11 Kansas 10,110 11 Illinois 25.2%

12 Colorado 10,032 23 Connecticut 21.1%

UNITED STATES $ 9,138 UNITED STATES 23.0%

Source: U.S. Department of Commerce, Census & BEA

• Connecticut's state and local debt burden in 2010 equals $11,415 per person.

• The state's burden is lower than its three neighboring states.

• After adjusting for its high personal income, Connecticut would rank 23rd in the nation in 2010.

• Based on 2010 data, Connecticut would rank 4th per capita in the nation and 4th on a personal income basis based on state debt alone.

IMPACT OF DEBT EXPENSES DEBT SERVICE EXPENDITURES

GENERAL FUND

$1.26 $1.31 $1.48 $1.41 $1.47

$1.62 $1.63

$1.81 $1.85 $1.97

$2.09 $2.20

9.4%

9.0%

9.6%

8.5%

8.5%

9.4%9.1%

9.7% 9.6% 9.5% 9.5% 9.6%

4%

5%

6%

7%

8%

9%

10%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

'05 '06 '07 '08 '09 '10 '11 '12 '13 Est.

'14 Fcst.

'15 Fcst.

'16 Fcst.

Deb

t Ser

vice

As

% O

f Bud

get

Deb

t Ser

vice

(Bi

llion

s)

Fiscal Year

• Debt Service expenditures as a percentage of the General Fund budget has remained fairly steady.

• The issuance of nearly $1.0 billion in Economic Recovery Notes to fund the FY 2009 deficit required additional debt service of $208 million in FY 2012 through FY 2016.


40

CONNECTICUT’S BOND RATING CURRENT GENERAL OBLIGATION BOND RATING

Moody's S&P Fitch Kroll

Rating Aa3 AA AA AA

Outlook Stable Stable Stable Stable

• Prior to 1975, Connecticut’s General Obligation (GO) bonds had the highest rating possible: Aaa by Moody’s and AAA by Standard & Poor’s (S&P)

• The most recent revision in Connecticut’s bond rating was a change to Aa3 from Aa2 by Moody’s in January 2012.

NUMBER OF STATES RATED

Rating Moody's S&P Fitch

Better than CT 34 19 26

Equal to CT 2 15 6

Lower than CT 2 4 4

Total* 38 38 36 * 39 states issue GO bonds. All 39 states are rated by Standard and Poor’s and Moody’s, Fitch has no ratings for Arkansas and New Mexico, and Kroll’s only state‐level rating is for Connecticut.

NEIGHBORING STATES’ RATINGS

State Moody's S&P Fitch

Vermont Aaa AA+ AAA

Massachusetts Aa1 AA+ AA+

New Hampshire Aa1 AA AA+

Maine Aa2 AA AA+

New York Aa2 AA AA

Rhode Island Aa2 AA AA

Connecticut Aa3 AA AA

New Jersey Aa3 AA‐ AA‐

IMPORTANCE OF BOND RATINGS

• The rating process informs investors about risk

• The rating process shows how we compare relative to other investments

• Connecticut is a high‐debt state

• Low ratings will result in higher borrowing costs


41

CONNECTICUT’S CREDIT RATING State Credit Strengths

• Historical application of operating surpluses to the Budget Reserve Fund • Early repayment of the Economic Recovery Notes issued to cover operating deficits • Wealthiest state in the nation with per capita income well above national levels • Commitment to structural budget balance in current biennium

State Credit Challenges

• Vulnerability to financial market fluctuations due to effect on capital gains for high wealth residents and employment in the financial services sector

• Deterioration of already weak GAAP‐basis balance sheet due to negative unreserved/under‐designated General Fund balance and depletion of Budget Reserve Fund

• Debt ratios are among the highest in the nation • Pension systems have low funding ratios

What could make the state rating improve

• Achievement and maintenance of high GAAP‐basis combined available reserve levels • Established trend of structural budget balance • Evidence of a stronger economic performance • Reduced debt ratios • Significantly improving the funding of pension and post‐retirement liabilities

What could make the state rating deteriorate

• Lack of improvement in available reserve levels • Failure to identify a plan that improves the state pension funded ratios and lowers its overall fixed costs • Reversion to significant one‐time budget solutions including the use of deficit financings to resolve

budget gaps • Reduction in cash flow‐reduced liquidity • Substantial revenue weakness driven by delayed economic recovery


42

REDUCING THE SIZE OF STATE GOVERNMENT

The size of state government has been significantly reduced through the efforts of Governor Malloy’s administration. This reduction applies to the number of state agencies, which experienced a number of significant consolidations and mergers, as well as to the size of the state workforce, which has undergone substantial attrition.

• State agencies

o Reduced the number of budgeted state agencies by 26%, from 81 to 60.

o Major consolidations include:

Higher education ‐ Creation of the Board of Regents for Higher Education and the Office of Financial and Academic Affairs for Higher Education (affecting DHE, CSU, CTCs, Charter Oak State College).

Department of Administrative Services (combining DAS, DOIT, portions of DPW).

Department of Economic and Community Development (merging DECD, OWC, CCT).

Department of Emergency Services and Public Protection (consolidating DPS, DEMHS, POST, FPC).

Office of Governmental Accountability (merging watchdog agencies and various other offices and commissions).

Based on Executive Branch General Fund and Special Transportation Fund payroll data for 12/18/08, 12/31/09, 12/30/10, 12/29/11, and 10/18/12 payrolls; excludes constituent units of Higher Education.

31,568

29,384 29,137

27,231 27,829

25,000

26,000

27,000

28,000

29,000

30,000

31,000

32,000

Dec 2008 Dec 2009 Dec 2010 Dec 2011 Oct 2012

Full‐time Executive Branch Employees on Payroll


43

Bargaining UnitFull Time Employees

Full Time Payroll (All Funds)

Expiration Date

Contracts in Negotiation

State Police (NP‐1) 1,134 73,820,407$ 6/30/2011

Correctional Supervisor (NP‐8) 469 32,553,949 6/30/2011

Settled Contracts

Service/Maintenance (NP‐2) (b) 4,052 176,620,127$ 6/30/2016

Administrative Clerical (NP‐3) 4,159 186,441,053 6/30/2016

Correctional Officers (NP‐4) (a) 4,883 250,682,165 6/30/2016

Protective Services (NP‐5) 847 47,030,649 6/30/2016

Health NonProfessional (NP‐6) (c) 3,593 174,915,255 6/30/2016

Health Professional (P‐1) (c) 3,130 219,499,204 6/30/2016

Social and Human Services(P‐2) 4,023 240,953,125 6/30/2016

Education A (P‐3A) (c) 263 22,654,912 6/30/2016

Education B (P‐3B) (c) 713 46,209,690 6/30/2016

Engineer, Scien, Tech (P‐4) 2,542 186,384,865 6/30/2016

Admin and Residual (P‐5) 3,013 215,714,115 6/30/2016

St Vocation Federation Teacher (c) 1,201 81,956,636 6/30/2016

Amercan Fed of School Admin (c) 51 5,774,335 6/30/2016

Comm College Faculty ‐ AFT 206 11,853,468 6/30/2016

State University Faculty 13 927,718 6/30/2016

State University Non‐Fac Prof 1,747 111,270,555 6/30/2016

Comm College Faculty CCCC 684 42,789,993 6/30/2016

UConn ‐ Faculty 1,653 147,319,739 6/30/2016

UConn ‐ Non‐Faculty 1,769 106,074,746 6/30/2016

UCHC ‐ Faculty 578 97,119,480 6/30/2016

UConn ‐ Law School Faculty 49 7,119,509 6/30/2016

Judicial ‐ Judges 266 28,943,983 6/30/2016

Judicial ‐ Professional 1,320 100,868,843 6/30/2016

Judicial ‐ Non‐Professional 1,385 72,800,856 6/30/2016

Judicial ‐ Law Clerks 125 3,036,421 6/30/2016

UCHC Univ Hlth Professionals 2,391 132,346,716 6/30/2016

Comm College Admin ‐ CCCC 702 41,976,091 6/30/2016

Conn Assoc Prosecutors 246 25,120,138 6/30/2016

Comm College Admin ‐ AFSCME 87 5,613,681 6/30/2016

Criminal Justice Residual 130 6,414,824 6/30/2016

Higher Ed ‐ Professional Emp 36 2,312,842 6/30/2016

Bd State Acad Awards Prof 64 4,099,943 6/30/2016

Judicial ‐ Judicial Marshals 713 30,278,451 6/30/2016

StatePoliceLts&Captains (NP‐9) 40 2,025,035 6/30/2016

DPDS Public Defenders 201 18,832,145 6/30/2016

DPDS Chief Public Defenders 17 2,323,361 6/30/2016

Criminal Justice Inspectors 73 5,877,183 6/30/2016

Comm College AFT Couns/Lib 15 1,215,425 6/30/2016

Judicial ‐ Supvr Jud Marshals 59 3,784,686 6/30/2016

Total Covered by Collective Bargaining 48,642 2,973,556,320$

Not Covered by Collective Bargaining 3,796 332,561,079$

FULL TIME WORKFORCEAs of October 2012

Note: As of 10/4/12. Payroll amounts include all regular wages for full time employees excluding overtime, shift differentials,premiums, etc. Those not covered by collective bargaining include employees of the Legislative branch, elected and appointedofficials, and managerial and confidential employees.


44

FEDERAL FISCAL CHALLENGES The “Fiscal Cliff” Threatens to Undermine the Economic Recovery

Fiscal Cliff The “fiscal cliff” refers to simultaneous expiration of a number of federal stimulus measures coupled with budget cuts to reduce the national debt threatens to return the country to recession at the start of 2013. The Congressional Budget Office estimates that if nothing is done to change this, U.S. Gross Domestic Product (GDP) will contract 1.3 percent over the first six months of 2013 and will experience little growth over the last six months of 2013, amounting to a miniscule 0.5 percent overall GDP growth in 2013. The current belief is that Congress will take steps to lessen the impact and severity of the fiscal cliff, but an economic impact is still expected in Q1 2013. There is, however, no guarantee as to what type of agreement, if any, will be reached. Of further concern is the impact the fiscal cliff and federal deficit will have on the current economy. It has been reported that many companies are postponing hiring and large investment decisions due to an unusually high degree of economic uncertainty created by the unresolved fiscal cliff. Payroll Tax Cuts Workers temporarily receive larger paychecks based on a withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate. The reduction in the payroll tax rate was extended through the end of the 2012 calendar year. Bush Era Tax Cuts The current agreement extends Bush‐era cuts at all income levels through the end of 2012. Should these tax cuts expire, the top rate will rise from 35 percent to 39.6 percent and other rates will rise in similar fashion and the reduction in consumer spending power is expected to inhibit economic growth. Extended Unemployment Compensation Expiration Extended unemployment benefits expire at the end of 2012. This would cut off benefits to some still facing unemployment, greatly hindering their spending power. Connecticut has already crossed an unemployment rate threshold such that residents no longer qualify for the full length of extended benefits. Connecticut residents do, however, still benefit from the extended coverage to a lesser degree. Sequestration Sequestration refers to drastic automatic spending cuts that could kick in at the end of this year in accordance with the agreement reached during last year’s debt ceiling negotiations. The law requires $1.2 trillion in automatic cuts equally divided between defense and domestic programs, over the next decade, with the first $109 billion in savings due to take effect January 2, 2013. Connecticut’s relatively high concentration in defense industries makes its economy more vulnerable to these cuts.


45

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES One of the hallmarks of Governor Malloy’s administration has been to improve financial transparency and accountability. On January 5, 2011, immediately following his taking the oath of office, the Governor issued Executive Order No. 1 directing the state to initiate a process to reflect the use of Generally Accepted Accounting Principles (GAAP) for budgeting purposes. The legislative outgrowth of that directive was sections 43‐49 of Public Act 11‐48 which mandate the use of GAAP for budgeting purposes beginning July 1, 2013. Specifically, the law made the following changes: 1. Transition Years FY 2012 and FY 2013. Sets up FY 2012 and FY 2013 as transition years whereby GAAP

principles are initiated on a state‐wide basis, but not an agency specific basis. It achieves this by directing the Comptroller to reserve from unappropriated surplus a maximum of $75 million in fiscal year 2012 and a maximum of $50 million in FY 2013 to be applied toward any increase in the unreserved negative general fund balance on the theory that these amounts were the estimated increase in the GAAP annual deficits for those years. [Section 46]

2. GAAP Start Date FY 2014. Requires the implementation of GAAP for budgeting purposes beginning with FY 2014. [Sections 45, 47]

3. Amortization of Deferred Charge. Directs the Comptroller to establish a deferred charge for accrued and unpaid expenses on the balance sheet of the state as of June 30, 2013 and directs that such charge be amortized in equal increments over 15 years commencing with FY 2014. [Section 45]

4. Balanced Budget Definition and Prior Year Annual Deficits. Modifies the definition of what constitutes a balanced budget. Beginning with FY 2014, any prior year’s deficit reported in the most recently published Comprehensive Annual Financial Report (CAFR) must be rolled into the balance calculation of the Governor’s proposed and the Legislature’s adopted budget. Revenues must exceed the sum of total appropriations plus any prior year deficit. Given the timing of the CAFR release this will typically mean any deficit two years prior to the budget in question. [Sections 43, 48]

5. Preliminary Comptroller’s Report. Revises the date by which the Comptroller must release a preliminary, unaudited report on the most recently completed fiscal year from September 1st of each year to September 30th. [Section 44]

6. Future Surpluses. Dedicates, beginning with fiscal year 2014, any future unappropriated surpluses toward the annual amortization of the deferred charge. This would place the deferred charge ahead of the early repayment of the 2009 Economic Recovery Notes and deposits to the Budget Reserve Fund. [Section 46]

7. End of Year Payments. Removes the 30 day grace period after the close of the fiscal year for certain expenditures to be made if there is no succeeding appropriation in the new fiscal year. Because expenditures will accrue to the appropriate period under GAAP principles, this limitation no longer applies. [Section 49]

The budget that Governor Malloy will propose for the FY 2014‐15 biennium will comply with these requirements by: • Proposing appropriations within each budgeted agency to reconcile the difference between the

anticipated level of expenditures as measured on an accrual basis and the anticipated level of expenditures as measured on a cash basis. For FY 2014, the current services adjustment to the General Fund for this purpose totals $82.2 million, rising to $118.8 million by FY 2016.

• Reflecting sufficient revenue in excess of expenditures to support the anticipated annual installments

toward the amortized deferred charge.


46

HEALTH CARE REFORM

The Patient Protection and Affordable Care Act, P.L. 111‐148, and the Health Care and Education Reconciliation Act of 2010, P.L. 111‐152, were both signed into law in March of 2010 and together they are referred to as the Affordable Care Act (ACA). This act includes a wide variety of health care provisions and requirements. Key points of the health care reform law:

• Requires most U.S. citizens and legal residents to obtain health coverage. • Encourages employers to offer health care coverage to their employees by providing tax credits

to small businesses who purchase health insurance for their employees, and taxing employers who do not provide health care coverage.

• Creates a state‐based Health Insurance Exchange which allows individuals and small businesses to purchase health insurance coverage. These exchanges include premium and cost‐sharing credits to individuals and families within specific income brackets.

• Establishes an office of health insurance consumer assistance or an ombudsman program to serve as an advocate for people with private coverage in the individual and small group markets.

• Prohibits lifetime limits on coverage, and prohibits pre‐existing condition exclusions for children. Insurance rating rules allow variation based solely on age, area, family composition, and tobacco usage.

• Establishes a temporary high‐risk pool to provide health coverage to individuals with pre‐existing medical conditions. This pool has limited federal funding for qualified states.

• Establishes reporting requirements regarding medical loss ratios and premium rate increases. • Creates a website to assist consumers in finding and understanding health care coverage

options. • Makes many Medicare and Medicaid enhancements and changes.

The law provides significant opportunities and related costs to the state. It supports expanded coverage to thousands of uninsured and underinsured residents and provides opportunities to reduce payments made by several state agencies to subsidize uncompensated care on behalf of their clients to the providers that care for them. The administration continues to analyze the full budgetary impact of this act. DEPARTMENT OF SOCIAL SERVICES

Medicaid Eligibility

Allows states the option of covering childless adults up to 133% of the federal poverty level (FPL) under a Medicaid state plan amendment beginning April 1, 2010. Effective January 1, 2014, states can opt to provide Medicaid coverage to parents, children age 6 and older, and all childless adults up to 133% FPL. Impact: In June 2010, Connecticut gained approval from the federal government to expand Medicaid coverage to an estimated 45,000 low‐income adults who had been enrolled in a more limited benefit package under the State Administered General Assistance program. As of October 2012, there were 83,827 individuals enrolled in the Medicaid Low‐Income Adults program (HUSKY D). The extension of Medicaid benefits to individuals with income between 55% FPL and 133% FPL is currently projected to result in increased costs of $52 million in FY 14, $301 million in FY 15 and $398 million in FY 16. These costs will be 100% reimbursed by the federal government through 2016, after which the federal reimbursement will be phased down to 90% in 2020. (Note: The ACA provisions regarding parents and children age 6 and older do not impact Connecticut as the state already covers these individuals under HUSKY A.)


47

Maintenance of Effort (MOE) Prohibits states from reducing eligibility standards, methodologies, or procedures for (1) adults on Medicaid until December 31, 2013, or (2) children until September 30, 2019 (both Medicaid and the Children’s Health Insurance Program (CHIP)). Between January 1, 2011, and December 31, 2013, a state can be exempt from MOE for optional non‐pregnant non‐disabled adult populations above 133% FPL if the state certifies that it is currently experiencing a budget deficit or projects a budget deficit in the following fiscal year. Impact: Reduces state’s flexibility to make certain reductions.

Definition of Medical Assistance Redefines medical assistance to include not only payment for medical care and services, but also the care and services themselves. Impact: Could increase litigation against states, particularly lawsuits claiming delays in the delivery of services due to access issues.

Primary Care Provider Reimbursement Requires states to increase Medicaid reimbursement for primary care services provided by primary care doctors to Medicare levels for calendar years 2013 and 2014. Impact: Costs are currently projected to be approximately $50 million per year. Estimates will likely be revised after further review of the final federal rule, which was issued November 2, 2012. The cost of the increase to the Medicaid program will be fully reimbursed by the federal government.

Incentives for States to Provide Home & Community‐Based Services (HCBS) Creates financial incentives for states to move more Medicaid beneficiaries out of nursing homes and into the community by extending the Money Follows the Person (MFP) Rebalancing Demonstration through FFY 2016 and reducing the six month requirement for institutionalization to three months, as well as increasing the federal match under the Balancing Incentive Payments Program for states that increase the proportion of Medicaid spending on home and community‐based services. Impact: Will result in enhanced federal reimbursement with more individuals leaving institutional long‐term care settings through the MFP program. Supports the state’s shift to a system that better supports consumers’ informed choice with greater access to long‐term services and supports in the community.

Medicaid Disproportionate Share Hospital (DSH) Payments Reduces federal DSH payments by $500 million in FFY 2014, increasing to $5.6 billion by FFY 2019, with some easing in FFY 2020 when federal payments are reduced by $4 billion (the majority of the reductions occur in FFY 2018, FFY 2019 and FFY 2020). Directs HHS to develop a methodology for reducing federal DSH allotments to states in order to achieve the mandated reductions, imposing larger reductions to states with lower percentages of uninsured. Impact: In FY 2013, the state will receive approximately $200 million in DSH. Because Connecticut is a “high DSH” state, the state’s DSH allotment is expected to be reduced by approximately $7 million in FY 2014, increasing to $103 million in FY 2019, with a FY 2020 reduction of $83 million. These estimates will need to be refined further once HHS establishes the methodology that will be applied to determine the reductions.

Tobacco Cessation Requires states to provide coverage under Medicaid for tobacco cessation services for pregnant women. Impact: Potential short‐term costs and long‐term savings. Connecticut implemented this provision in October 2010.


48

Legal Immigrants Allows legal immigrants with income under 133% FPL, who are not eligible for Medicaid by virtue of the five‐year waiting period, access to coverage if the state implements a basic health program. (Legal immigrants who are barred from enrolling in Medicaid during their first five years in the U.S. will be eligible for premium credits through the Exchange.) Impact: Expands federal reimbursement for non‐citizens beyond the Children’s Health Insurance Program Reauthorization Act (CHIPRA), which extended federal reimbursement to children and pregnant women. If a basic health program is implemented, this would result in additional state costs, a portion of which would be federally reimbursable.

Fraud, Waste and Abuse Reduces waste, fraud, and abuse in public programs by strengthening efforts in this area. Impact: Should help in the state’s ongoing efforts. STATE OF CONNECTICUT EMPLOYEE HEALTH PLAN Early Retiree Reinsurance Program (ERRP) The ERRP provides financial relief for employers, unions and state and local governments to help them maintain coverage for early retirees age 55 and older who are not yet eligible for Medicare, and their spouses, surviving spouses, and dependents. The amount of reimbursement to the employer is 80% of medical claims costs for health benefits between $15,000 and $90,000. The Affordable Care Act provides $5 billion in financial assistance. The program was scheduled to end on January 1, 2014; however, ERRP received requests for reimbursement that exceeded the $5 billion appropriated. Impact: The state’s application to participate in the ERRP was approved by the U.S. Department of Health and Human Services. The state received $4.7 million as of January 19, 2012. INSURANCE DEPARTMENT Regulation Enhancements Insurance policy forms and rates will need to conform to the requirements of the federal law and be filed for approval. Claims payment policies, enrollment and disenrollment data, financial disclosures, claims denials, rating practices, out‐of‐network payments and other information must be filed with DOI and available for public inspection. DOI must annually review unreasonable rates for group and individual plans.


49

EFFORTS TO PRESERVE AND MAXIMIZE FEDERAL FUNDING

The administration continues to make federal revenue maximization efforts a priority. Numerous Medicaid state plan amendments and waivers have been submitted or are in the process of being submitted to the federal government. Initiatives not requiring federal approval are being operationalized by impacted state agencies. In the current fiscal year and next, millions of dollars could be gained in new federal revenue due to these initiatives – above and beyond normal increases in federal Medicaid revenue resulting from growth in caseload and utilization. A consultant has been secured by OPM with funds that were budgeted in FY 2013 to support revenue maximization activities. Discussions are ongoing as to what the contactor’s scope of work will include.

Some of the major revenue maximization efforts under development include:

• Serving existing clients of the Departments of Developmental Services, Mental Health and Addiction Services and Children and Families under three autism waivers, allowing the state to receive federal reimbursement for services currently being provided at 100% state cost;

• Billing for community‐based care for offenders in the Department of Correction, allowing the state to receive federal reimbursement for services that are currently being supported at 100% state cost;

• Developing a waiver that will allow the state to claim federal reimbursement for services rendered in a private institutional setting that are currently provided at 100% state cost;

• Developing waivers that will allow Medicaid reimbursement for certain behavioral/rehabilitation services being provided by the Department of Mental Health and Addiction Services that are currently at 100% state cost;

• Billing for costs in several state agencies associated with the administration of Medicaid services; • Providing nursing home care for individuals currently being cared for in infirmaries in the

Department of Correction and Connecticut Valley Hospital. Providing these services in the community will permit reimbursement for care that is currently at 100% state cost;

• Amending the waiver for individuals with acquired brain injury to allow Medicaid reimbursement for services supported by DMHAS’ state‐funded TBI Community Services account;

• Accrediting state operated Psychiatric Residential Treatment Facilities (PRTFs) to make services provided there Medicaid reimbursable.

While much effort goes into maximizing revenue, equal or greater effort goes into preserving existing sources of federal reimbursement. The Centers for Medicare and Medicaid Services has strengthened its compliance activities, resulting in significantly greater scrutiny of all state claims. Department of Social Services staff and impacted state agencies have experienced significantly increased time and effort explaining and justifying revenue items in order to sustain claims worth hundreds of millions of dollars that had once been considered “routine.”


50

SUMMARY OF LOCAL AID

• Amounts include appropriations, revenue intercepts, Teachers’ Retirement System contributions, state share of school construction, and other bonding programs in support of municipalities.

• LoCIP, STEAP, Local School Construction and Teachers’ Retirement Debt Service are funded with General Obligation bonds.

• Regional Performance Incentive Grants, as well as the Manufacturing & Revenue Sharing Grant are funded through revenue intercepts.

• The provisions that cap the Public School Transportation, Non‐Public School Transportation, Adult Education, and Special Education Student Based grants expire at the end of the 2012‐2013 biennium; therefore the grants are fully funded at statutory formula levels for FYs 2014‐2016.

• Assumes standard inflation rate for Extended School Building Hours and School Accountability.

• For FY 2014 and FY 2015, estimates for Magnet Schools and Open Choice grant are based on anticipated enrollment.

• Assumes level funding for Town Aid Road, municipal PILOT programs, LoCIP and STEAP and the statutory transfer amount for the Mashantucket Pequot and Mohegan grant.

• Support to municipalities constitutes 22.87% of the 2013 General Fund budget.

• Support to municipalities will be approximately $4.85 billion in FY 2014, a 6.92% increase over the FY 2013 level.

$4,433.0

$4,853.8

$5,055.4

$5,246.2

$4,000.0

$4,200.0

$4,400.0

$4,600.0

$4,800.0

$5,000.0

$5,200.0

$5,400.0

FY 2013 FY 2014 FY 2015 FY 2016

All Sources of Municipal Support FY 2013‐2016(in Millions)


51

GRANT FY 2013 FY 2014 FY 2015 FY 2016State Owned PILOT* $ 78.3 $ 78.3 $ 78.3 $ 78.3 College & Hospital PILOT 115.4 115.4 115.4 115.4 Mashantucket Pequot & Mohegan Grant 61.8 135.0 135.0 135.0 Town Aid Road Grant 30.0 30.0 30.0 30.0 LoCIP 30.0 30.0 30.0 30.0 Regional Performance Incentive Grants 8.9 9.2 9.6 10.1 Manufacturing Transition & Municipal Revenue Sharing Grants

94.1 98.0 102.3 107.0

STEAP 20.0 20.0 20.0 107.7 Miscellaneous General Government Grants 23.6 25.5 26.0 26.9 Subtotal ‐ General Government $ 462.1 $ 541.4 $ 546.7 $ 640.4

Public School Transportation $ 24.9 $ 84.7 $ 87.0 $ 89.1 Non‐Public School Transportation 3.6 4.6 4.7 4.8 Adult Education 21.0 22.9 23.5 24.1 Education Cost Sharing** 1,939.6 1,939.6 1,939.6 1,939.6 Magnet Schools 242.4 275.0 290.8 297.8 Special Education ‐ Student Based 139.8 177.3 185.9 190.4

Local School Construction Debt Service 500.0 500.0 500.0 500.0 Miscellaneous Education Grants 168.4 182.2 187.0 191.5 Subtotal ‐ Education $ 3,039.7 $ 3,186.3 $ 3,218.5 $ 3,237.3

Teachers' Retirement Contributions, Retiree Health Service Cost & Debt Service

$ 931.2 $ 1,126.1 $ 1,290.2 $ 1,368.4

Subtotal ‐ Teachers' Retirement $ 931.2 $ 1,126.1 $ 1,290.2 $ 1,368.4

Total ‐ Aid to Municipalities $ 4,433.0 $ 4,853.8 $ 5,055.4 $ 5,246.2

Notes:

STATE AID TO OR ON BEHALF OF LOCAL GOVERNMENTS(in Millions)

*Figures for the State Owned PILOT includes annual transfers from the Bradley Enterprise Fund in an amount necessary to pay 20% of the PILOT for certain Bradley International Airport Property. ** ECS does not include the portion of the appropriation that is attributable to the Charter Schools.


52

EDUCATION COST SHARING GRANT (In Millions)

• The Education Cost Sharing Grant (ECS) is the state's major education grant, designed to equalize the

ability of towns to finance local education costs. • Expenditures for FY 2010 and FY 2011 included federal American Recovery and Reinvestment Act State

Fiscal Stabilization Fund (ARRA SFSF) funding of $269 million (14% of the grant). • Beginning in FY 2013, Charter School Grants are appropriated under the ECS grant.

$1,809

$1,883

$1,615

$1,619

$1,889

$1,940

$1,940

$1,940

$1,940

$270

$270

$68 $77 $86 $89

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

'08 '09 '10 '11 '12 '13 Est. '14 Fcst. '15 Fcst. '16 Fcst.

ECS Grant ARRA Charter Schools


53

UNEMPLOYMENT COMPENSATION FUND The Unemployment Compensation Fund (“trust fund”) is established pursuant to Connecticut General Statutes Section 31‐261 for the purpose of paying benefits to unemployed workers. The trust fund is funded through payroll tax contributions paid by employers, and is not a budgeted fund of the state. The recent high unemployment rates in Connecticut will have an effect on Connecticut businesses for the next several years.

• As of September 2012, the Connecticut seasonally adjusted unemployment rate was 8.9%, leading to a sustained high level of claims against the fund.

• The maximum weekly benefit rate is currently $591 per claimant. Connecticut also pays $15 per dependent child up to a maximum of $75. Connecticut ranks 8th in the nation as to the maximum amount of benefits provided.

• In 2010, increases in job losses resulted in benefit payouts of approximately $1.3 billion from the trust fund, while only $700 million in taxes were collected. UI benefit payouts have also exceeded revenues in 2011 and 2012.

• Even with the fund solvency tax generating its maximum revenue annually, the trust fund became insolvent in October 2009.

• To continue making unemployment payments, Connecticut, like other states, has been borrowing from the federal government. The American Recovery and Reinvestment Act provided interest free borrowing through calendar year 2010. However, states with loans outstanding at the beginning of 2011 are subject to interest on these loans.

• Since Connecticut was unable to repay borrowed funds within two years, in January 2012 the federal government increased federal unemployment taxes on employers by increasing the current federal unemployment tax by 0.3% increments annually until the loan is fully repaid.

• Current projections, which are based on existing statutory provisions (both state and federal), indicate the need for continued borrowing until at least CY 2015. It is anticipated that final repayment of the loans will occur in CY 2015.

Projected Cash Flow ‐ Federal Unemployment Insurance *

Calendar Year

Amount Borrowed

Repaid by State UI Taxes

Repaid by Increased Federal

UI Taxes

2009 $180,000,000 $0 $0

2010 $345,000,000 $0 $0

2011 $285,000,000 $0 $0

2012 $125,000,000* $125,000,000* $30,000,000

2013 $100,000,000* $330,000,000* $60,000,000

2014 $100,000,000* $500,000,000* $90,000,000

2015 $100,000,000* $100,000,000* $0

Totals $1,235,000,000 $1,055,000,000 $180,000,000

*The figures above are based on current statutory provisions as well as projections of many variables such as unemployment benefit payouts, tax revenues, growth in wages and growth in labor force. Changes in these variables could result in changes in the borrowing amounts and also in the repayment schedule. Loan repayments by state taxes are estimated after payment of benefits. Please note that while borrowing is anticipated in calendar years 2012 to 2015, amounts borrowed in those years are anticipated to be paid back in the year borrowed. Funds borrowed in 2012 and 2013 will be classified as “cash flow loans” which may not be subject to interest.


54

Section 7 Analysis of Possible Uses of Surplus

Funds

ANALYSIS OF POSSIBLE USES OF SURPLUS FUNDS Given the structural budget reforms enacted during the 2011 legislative session and assuming adherence to the expenditure cap, surpluses would occur over the next several years. Under current law, these surpluses have already been committed. Specifically, the General Assembly passed Public Act 11‐48, section 46 that modified the disposition of any future surplus for fiscal years 2012 through 2028. Should the state experience surpluses during those fiscal years, any surplus would be distributed as follows:

1. Reserve an amount for FY 2013 not to exceed $50 million to freeze the current GAAP deficit at the June 30, 2011 level, which was approximately $1.75 billion. Because preliminary estimates of the June 30, 2012 GAAP deficit suggest a significant improvement over the 2011 level, this requirement is not anticipated to be operative. Starting in FY 2014 the amount to be reserved shall equal the annual amortization of the deferred GAAP charge, and then

2. Redeem any of the outstanding Economic Recovery Notes that were issued to finance the FY 2009 deficit of $947.6 million, and then

3. Deposit to the Budget Reserve Fund.

The current estimate of the GAAP deficit is $1.5 billion. Replenishment of the Budget Reserve Fund to the ten percent level would require approximately $2.1 billion. Beyond these commitments, other priorities could include:

Reducing bonded indebtedness;

Reducing the unfunded liability in the State Employees Retirement Fund;

Reducing the unfunded liability in the Teachers Retirement Fund;

Actuarially funding the unfunded liability for Other Post Employment Benefits; or

Providing funds for Higher Education Matching Grants as per sections 10a‐77a, 10a‐99a, 10a‐109c, 10a‐109i and 10a‐143a of the General Statutes.


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